By Charity Service trustee, Kate Thurman
For years, pensions have sat quietly outside the inheritance tax (IHT) net — a favoured way to pass wealth down the generations without a 40% tax bill attached. That’s changing. From April 2027, unused defined contribution pension funds will be brought into the taxable estate for IHT purposes, and for many families with sizeable pension pots, this will meaningfully increase what’s owed.
Against that backdrop, charitable giving from a pension on death deserves a fresh look. It remains one of the most tax-efficient tools in an estate plan — but the numbers behind it are shifting, and the planning needs to start now.
The reliefs themselves aren’t changing
It’s worth being clear about what the reforms do and don’t touch. Gifts to UK-registered charities will continue to pass to the charity completely free of IHT, regardless of size. And the well-known incentive that rewards more generous giving — a reduced 40% to 36% IHT rate on the rest of the estate where at least 10% of the “baseline amount” is left to charity — is also staying in place.
What’s changing is the size of the estate those reliefs are measured against. Once pensions are pulled into the taxable estate, the baseline amount used to calculate that 10% threshold grows too. In practice, that means the pound figure a client needs to give to charity to unlock the reduced rate is likely to rise, sometimes substantially, for anyone with a meaningful pension pot.
What this looks like in practice
Consider a client who, under today’s rules, would need to leave £100,000 to charity to reach 10% of a £1 million taxable estate. Add an unused £500,000 pension fund into that estate from 2027, and the baseline jumps to £1.5 million — meaning the gift required to still qualify for the 36% rate rises accordingly. The mechanism hasn’t moved; the goalposts have.
For clients who were already close to the 10% threshold, or who have philanthropic intentions they haven’t yet formalised, this is a natural moment to revisit the numbers and make sure legacy plans still do what they were designed to do.
Pensions could also trigger the residence nil-rate band taper
There’s a second, less obvious consequence of pensions entering the taxable estate: the residence nil-rate band (RNRB). This is the additional allowance — currently £175,000, frozen until April 2031 — available when a main residence passes to children or other direct descendants. It’s only available in full on estates below £2 million; above that, it tapers away at £1 for every £2 over the threshold, and is lost entirely once an estate reaches roughly £2.35 million (or £2.7 million for a surviving spouse benefiting from both nil-rate bands). Because the taper creates a band where the effective rate of tax can run as high as 60%, it’s one of the more punishing quirks in the IHT system.
The taper is calculated on the value of assets owned at death — and from April 2027, that will include unused pension funds. A client who currently sits comfortably under £2 million could find that adding their pension pot to the estate pushes them over the line, eroding or wiping out their RNRB altogether. A charitable gift that reduces the taxable estate below the £2 million mark, or that simply reduces the size of the estate exposed to the 60% effective band, can be a valuable piece of the same planning conversation.
Nominating a charity as a pension beneficiary
One of the most direct ways to make a charitable gift from a pension is through the scheme’s nomination or “expression of wish” form, rather than the will itself. This lets a client name a charity — alongside or instead of family beneficiaries — to receive some or all of the unused pension fund on death.
It’s a simple document to complete, but it’s also one that’s easy to forget about once it’s signed. Nominations don’t update themselves when circumstances, intentions, or the tax rules around them change — which is exactly what’s happening here. A nomination completed years ago, before pensions were ever expected to be part of the taxable estate, may no longer reflect what a client would choose today.
A Donor Advised Fund can also be useful in these circumstances. By nominating a Donor Advised Fund Provider, such as the Charity Service, to receive a gift from your pension your family members can access the benefits of a Donor Advised Fund and can take their time to choose which charities to support after you have passed away.
What advisers and donors should be doing now
With draft legislation published and the direction of travel clear, waiting until 2027 to act isn’t really an option. Three things are worth prioritising ahead of implementation:
- Revisit pension nominations. Check who’s named to receive death benefits, and whether a charitable element still makes sense given the new baseline calculations.
- Review wills alongside pension arrangements. Charitable legacies written into a will and charitable nominations sitting outside it need to work together, not in isolation, if the 10% threshold is the goal.
- Re-run the numbers on the 10% test. For clients previously just over or under the threshold, a pension now being added to the estate could change which side of the line they fall on.
A trend that’s already gathering pace
This isn’t a theoretical opportunity — it’s one wealthy families are already acting on. Recent research into high-net-worth households found a majority had increased their charitable giving over the past two years, with most expecting to give even more in the years ahead, and a large share having already written a charitable gift into their will. Part of the motivation is tax efficiency, but advisers report another driver too: many affluent parents are as concerned about leaving their children too much as too little, and see charitable legacies as a way to direct wealth purposefully rather than simply minimise a tax bill. With the 2027 pension changes on the horizon, that trend looks set to accelerate.
The bigger picture
The Treasury’s confirmation that charitable IHT reliefs are staying intact is good news for the charity sector — legacy income is a vital funding source, and the incentive to give remains a powerful one within the tax system. But “unchanged” rules measured against a larger estate produce a different outcome. For clients who care about leaving something to causes they believe in, and about doing so as tax-efficiently as possible, a conversation about pensions, nominations and the 10% threshold is well worth having before April 2027 arrives.
*This article is provided for general information and does not constitute financial, tax or legal advice. Tax treatment depends on individual circumstances and may change. Anyone considering a charitable gift from their pension should speak to a qualified financial adviser.*
