Bethany Joslyn, senior technical consultant at AJ Bell
The Charitable Aid Foundation’s UK Giving Report 2022 highlights the impact a global pandemic and the pressures of the cost-of-living crisis in the UK has had on the ability of UK households to give to those in need. Their research shows a fall in the overall amount people in the UK gave to charity in 2021 from £11.3 billion in 2020 to £10.7 billion, and that 1 in 8 people were thinking about cutting back on donations as a result of the cost-of-living crisis.
Despite this, their findings also show that most people engage in charitable and civic activities – with over 86% of those aged 55 or older doing so.
Pensions are often one of a person’s largest assets, so it’s perhaps no surprise that from time-to-time clients want to explore whether they can put their pension fund to work helping charitable causes.
Pensions legislation only permits certain authorised payments to be made from pensions, and unfortunately these don’t simply allow for donations to be made directly. This limits the options available, but there are two worth considering.
Payroll giving
Pension income is taxed via PAYE so payroll giving is available when income is being drawn, just as it is when someone receives their salary or wages.
As the donation must be made from income the member will have to crystallise some (or all) of their pension first. This means this option is normally only available to those who have reached the normal minimum pension age (currently age 55).
Any income paid through flexi-access drawdown will trigger the money purchase annual allowance (MPAA), even where payroll giving is used. This limits the member’s future ability to build up their pension savings, although the increase in the MPAA from 6 April 2023 to £10,000 makes this less punishing than it has been in previous years. Still, it’s important to balance lifetime gifting with ensuring your client feels secure in their retirement.
The donation is made by making a deduction before tax and then paying this to a Payroll Giving Agency which in turn pays the funds to the member’s chosen charity. Some agencies may charge an administration fee which would need to be paid by the scheme or deducted from the donation, and there is additional administration work required of the scheme administrator to set up these payments. Bespoke SIPP operators are therefore most likely to provide this service.
Gifting after death
The second avenue for gifting to charity from a pension is by making a donation from pension death benefits.
If the member nominates a charity in their expression of wishes and has no dependants, the lump sum will qualify as a charity lump sum death benefit. This means the funds won’t be tested against their lifetime allowance, and the lump sum will be free of tax regardless of the member’s age when they died. It can also be paid from a beneficiary’s drawdown pension.
However, charity lump sum death benefits can also only be paid from money purchase schemes, and the term dependants includes spouses, civil partners, and the member’s children who are aged under 23. So this isn’t an option for everyone.
Even if the conditions for a charity lump sum death benefit aren’t met, it is still possible for a lump sum to be paid to charity from pension death benefits. But it may be subject to tax.
If the member was under 75 no income tax will be due, as long as the payment is made within two years of the scheme being made aware (or should have become aware) of the member’s death. If the member died after they turned 75, a special lump sum death benefit charge of 45% will be deducted from the lump sum. Although this may seem like a significant sum, if other potential recipients (such as non-dependant family members not included in an expression of wishes) are higher rate or additional rate taxpayers the amount of tax to pay would likely be similar.
