Using pension funds for charitable purposes is a noble ambition but is not without challenges, says Martin Jones, Technical Manager at AJ Bell.
You might have clients who find themselves approaching retirement with more funds than they plan on needing. They may even have been involved in charitable endeavours during their working life.
It’s not inconceivable therefore that a client in later life might be looking to increase their financial commitment to charitable causes that are close to them.
Given that a pension could be a client’s largest pool of accessible funds, you might find yourself being asked to look into ways of releasing money from the pension to give to charity.
Unfortunately, this is not as straightforward as it could be.
Direct from the pension
The first question a client is likely to ask is whether there is any way of donating money to a charity direct from the pension scheme.
They might be familiar with charitable organisation ShareGift, for example, that allows investors to donate small shareholdings to charity.
Unfortunately, however, there is no prescribed mechanism in legislation to facilitate this.
Broadly speaking, the pension rules work by setting out a list of authorised payments. If a pension scheme were to make a payment outside of that list, it’s likely that HMRC would view it as an unauthorised payment, and this would incur significant tax charges for the member and for the pension scheme.
Given that there is no authorised payment for charity donations, the scheme administrator is extremely unlikely to facilitate a donation direct from the pension.
Donating from death benefits
The situation changes, however, upon the death of the member, at which point it becomes possible to make authorised lump sum payments to charities.
If a client was under the age of 75 when they died, any lump sum death benefit paid to any recipient would be free from tax, and there are no restrictions in terms of who or what can receive such a lump sum. The lump sum, however, would be subject to the lifetime allowance
If they were aged 75 or over, the lump sum would be subject to a 45% tax charge (albeit no lifetime allowance test).
The other option is a specific authorised payment called a charity lump sum death benefit. This is a lump sum paid to a registered charity that is tax-free regardless of the member’s age at death.
It can be paid from drawdown funds or from uncrystallised funds. It can be paid from a beneficiary’s pension. And, unlike other lump sum death benefits, it’s also free from the lifetime allowance.
There are, however, a couple of requirements. First, it can only be paid to a charity nominated by the member. Second, it can only be paid if the member had no dependants.
The definition of dependants includes spouses, civil partners and children under the age of 23. In practical terms, therefore, it might only be an option for clients who’ve lost their spouses and not remarried.
Through payroll giving
There is another option, and this is through a mechanism called ‘payroll giving’.
This is a PAYE process rather than a pensions process, but given that pension schemes are required to deduct income tax from income payments under PAYE it can be used with pensions.
Under payroll giving, individuals can donate money to charity from their gross income, and the income tax that would’ve been deducted is paid to the charity instead. For higher rate and additional rate tax payers, this could look quite appealing.
In order to go down this route, the client would need to take benefits from their pension, meaning they need to be at least 55 years old.
It also depends on the provider being comfortable setting up the payroll giving process – the main challenge being that donations must be routed through an authorised payroll giving agency, of which there are about 20 in the UK.
This requires the provider to put in place contractual arrangements with that agency, to potentially pay charges, and certainly to put in the leg work to get it set up.
While an employer might be happy to absorb the costs as it’s a benefit they can offer their staff, a commercial pension provider might look at it differently (or at least might want to charge the client for it). It’s something therefore that might only be offered by the more bespoke providers in the market.
All of which leaves a client with fairly limited options, and it’s likely to mean that only the more determined clients will look to pursue a course of action in this area, which is a shame when there are potentially hundreds of thousands of pounds that could be unlocked for charitable causes.