In the past, pensions could be used as both a retirement plan and a tax-planning vehicle. They allowed wealth to pass down the generations IHT free. However, the changes to IHT on pensions in the UK Government’s Autumn budget in 2024 were seismic. They will widen the IHT net considerably from 6 April 2027.
Why do I now have to pay inheritance tax (‘IHT’) on my pension?
The Finance Act 2026, which is the implementing legislation, received Royal Assent on 18 March 2026. The Government’s own forecasts anticipate that the changes will lead to 10,500 estates, which would pay no IHT under current rules, paying IHT in the first tax year following the changes. A further 38,500 estates will pay more IHT than they would do under the current rules.
Will one of those estates be mine?
The first step is to determine whether your pension is of a type which will now be within the IHT net. There are still some pensions which will not be subject to IHT. Death in service benefits from registered schemes and dependent scheme pensions will continue to be excluded from the scope of IHT. However, most unused pension will now see their value brought within a person’s estate for IHT.
Charitable giving and inheritance tax
One means of tackling this increased tax exposure is to consider charitable giving. This has long been recognised as an effective means of mitigating IHT, allowing you to direct your assets to the charities that you care about IHT free. Assets which are gifted during lifetime or left on death to charity are exempt from IHT. As a further incentive, broadly speaking, if 10% or more of a deceased person’s net estate is left to charity, IHT is charged at a reduced rate of 36%, as opposed to the usual 40%.
There are two main routes to consider: making charitable gifts from pension income you draw during your lifetime; and leaving pension funds (or a part of them) to charity on death.
Gift Aid: drawing pension income and donating it to charity
For those who are drawing income from their pension, one straightforward route to charitable giving and tax savings is to donate that income — or part of it — directly to charity. Under the Gift Aid rules, a charity can reclaim from HMRC the basic rate income tax that the donor has already paid on the income they donate. This means that an £80 donation is worth £100 to the charity once it has reclaimed the tax. The donor gets the benefit of having made a larger gift at no extra personal cost.
Higher and additional rate taxpayers can also claim income tax relief on the difference between their marginal rate and the basic rate through their self-assessment tax return. So a 45% additional rate taxpayer donating £80 under Gift Aid — a gross donation for the charity of £100 — can reclaim a further £25 (the difference between 45% and 20% of the £100 gross), reducing the effective cost of the donation to £55.
There are important conditions. The donor must have paid sufficient income tax or capital gains tax in the tax year to cover the amount the charity reclaims. As pension income is itself taxable income, drawdown from a pension pot will generally satisfy this condition, but it is worth confirming the position each tax year, particularly if donations are made from other income sources or from capital.
Leaving your pension to charity on death
The alternative is to leave your pension, or part of it, to charity on death. Most modern defined contribution pension schemes permit you, as a member of the scheme, to nominate a charity as a beneficiary of your death benefits. However, this is a matter for your scheme's trust deed and rules, and practice does vary between providers. You should check with your pension provider whether a charitable nomination is permitted and, if so, whether there are any restrictions on the proportion of benefits that can be directed to a charity.
It is worth noting that a pension does not pass under a person's will. Death benefits are held in trust by the trustees of the pension scheme, who retain discretion over how benefits are paid. You can record your wishes by completing an “expression of wish” or “nomination of beneficiaries” form. The trustees are not legally bound to follow your wishes but in practice they almost always do. It is therefore important to complete this form and keep it up to date, making clear your intention to benefit a named charity and the proportion of funds to be directed to it.
Can I secure the 36% rate?
When considering the “10% test” mentioned above, and whether the assets can benefit from a 36% rate of IHT, the estate is divided into separate components. These are the survivorship component (jointly owned assets passing by survivorship), the settled property component (certain trust assets), and the general component (the free estate, i.e. assets passing under the will or intestacy). The 10% test is applied component by component. If 10% of one component is left to charity, the reduced rate applies to that component, but not necessarily to the others. HMRC has confirmed that any pension assets passing to charity will form part of the general component for these purposes.
This is a technical but important point. It means that leaving 10% of your combined total pension and other general component assets (which generally includes all assets which are not subject to a survivorship or held in trust) will mean that you qualify for the 36% rate across both your pension and non-pension assets. On the other hand, it does mean taking those assets together as a single component. It is not, for example, possible to benefit from the 36% rate by leaving only 10% of your pension to charity, and none of your other general component assets. You have to leave 10% of the combined total, in order to qualify. Nevertheless, the ability to secure the 36% rate of IHT remains a valuable means of mitigating your IHT exposure, while helping those charities which are close to your heart.
What should I do now?
The first step is to understand whether your pension is caught by the IHT rules. If it is, and you are interested in using charitable giving as a means of mitigating the IHT which may be payable on your death, then please get in touch.
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