Inheritance Tax and pensions: preparing for the 2027 change

What should you do?

If you have a significant amount in one or more Defined Contribution pensions (such as Personal Pensions, SIPPs, SSASs, QNUPS or QROPS), it is very important to get tailored, specialist advice about how this will affect your circumstances.

If you have a pension that you are not drawing upon, or which will still be substantial on your death, you may want to consider a gift to charity in life or as a legacy. As well as being a wonderful way to support the causes you care about, this can have major tax efficiencies.

During your lifetime, you can make a tax-free charitable gift directly from your pension via payroll giving, if your pension provider has signed up to the scheme.

You may also have the option of withdrawing funds from your pension, paying and then reclaiming the tax paid through a combination of Gift Aid and your self-assessment.

On death, leaving 10% or more of your estate to charity, reduces the IHT rate from 40% to 36%, which can result in significant reductions in the IHT due. However, charitable payments from undrawn pension savings and those from your main estate may be treated differently for tax purposes. If you are considering leaving a charitable bequest, speak to a specialist tax adviser, who can recommend the most appropriate way to structure it for your circumstances.

If you decide to add or increase the amount you are leaving to charity, CAF can help. Our Charitable Legacy Service provides a simple, efficient way to support multiple beneficiaries.  

CAF’s perspective on these changes

The Charities Aid Foundation (CAF) exists to encourage and facilitate charitable giving and supports a system of simple tax incentives which makes it appealing for donors to give.

CAF has been a Payroll Giving Agency since the scheme launched in 1987, and we are calling on all pension providers to make payroll giving available to their clients so they can benefit from a simple, tax-free way to give to charities from their pension, during their lifetimes.

If you are setting up a new pension, or switching provider, and want to benefit from this option, make sure to check if payroll giving is on offer.

This article draws on expertise shared by Mike Bonner-Davies, Senior Private Wealth Adviser & Pensions Specialist, PwC.