Charities across the UK might find they have an unexpected source of financial support in the years ahead, when it comes to a (positive) unintended consequence connected to the 2024 Autumn Budget.
The Budget announced that from 6 April 2027, unused pension savings may be included in the pension owner’s estate for IHT purposes. Currently, IHT is not normally charged on the value of someone’s leftover pension pot(s) IHT net, and can pass to a family member, typically free of IHT, paid out at the discretion of the pension scheme trustees. There are some exceptions to this, but it’s a typical scenario at the moment.
The forthcoming introduction of IHT into the pensions sphere might sharpen the minds of higher net worth individuals, when it comes to thinking about who inherits your leftover pension. It will affect those who are in the fortunate position of having accumulated pension savings which they don’t fully spend before they die, and who are happy to gift them away on death for charitable benefit. This is particularly relevant for individuals who are single without children, or where loved ones are already well-established and someone doesn’t wish their leftover pension pot to go to them. The outcome is that unspent pension money which goes to a UK charity is exempt from IHT.
There is however a layer of detail here to watch out for. The steps you need to take to gift your unspent pension to charity entirely depend on the specific type of pension involved. With some older types of pension, you might need to check the scheme rules as to the treatment of any death benefits. However, with most modern types of pension plan, the unspent pension pot is paid out after death at the discretion of the pension scheme trustees. You normally have the option to complete a beneficiary nomination form, which can be updated and changed over time in line with your wishes. Some pension providers even enable you to do this online. This means you need to request a beneficiary nomination form from the pension provider, or use the pension provider’s online process to update the named beneficiary in your online pension profile, if you’d like to name a charity or charities to benefit.
Many donors have particular favourite charities already. Others might not know which charities they want to benefit, and instead might prefer that unspent pension monies are paid into a charitable ‘pot’ from which future grants can be made after their death. There are different types of charitable ‘pot’ which someone can set-up, and your solicitor can guide you through the differences between a donor advised fund (DAF) and other types of charitable structure. You normally need to set up these structures during your lifetime, so that they exist to later receive any leftover pension fund. This article has more information about donor advised funds and how they differ from setting up a standalone charity.
Until now, charities who communicate with their donors around legacy gifting typically do so with messaging around gifts in wills. Since modern pensions are not normally subject to the terms of someone’s will, and instead are paid out after death by pension scheme trustees with reference to a beneficiary nomination form, we might see charities develop new communications to ensure they don’t miss out on this potential source of gifts.
The details of how this inheritance tax change for pensions will be implemented are currently being worked through, and the final rules are not yet live. Meantime, it is possible today to put in place arrangements so that your leftover pension goes to charity, if you wish. Your financial adviser and solicitor can guide you on the details of what’s involved based on your personal circumstances and the specific types of pension plan you hold.
This article does not constitute legal advice or tax advice.
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