I would like to leave my favourite charity some money from my pension when I die. My husband will inherit my other assets through my will, and he will have enough money to be comfortable. We don’t have any children.

Can I do this? I thought there was a lot of flexibility to leave my pension money to whomever I want.

Emma

Rachel Vahey, AJ Bell Head of Public Policy, says:

Pension freedoms were introduced nearly 10 years ago and completely changed the way pension wealth can be passed on when someone dies.

An individual has the freedom to nominate whoever they want to receive their pension fund when they die, meaning these funds can be passed easily to children and grandchildren rather than always having to go to the living spouse or dependant.

A pension scheme is usually held in trust. Trustees look after the pension money on behalf of the beneficiaries – in this case the members of the pension scheme. When a pension scheme member dies the trustees normally have the ultimate decision who to pay the pension fund money to. This trustee ‘discretion’ is the reason why pension funds aren’t usually subject to inheritance tax.

When making this decision, the pension scheme trustees will consider if there are any dependants still living such as a spouse or partner. A member should also fill in an expression of wish or nomination form putting down who they would like to inherit the funds, and trustees will take this into account as well.

An individual could, for example, nominate an adult child if they are happy any surviving dependant would have other financial assets to rely on. The trustees may then look at the evidence and agree to the adult child inheriting the pension funds.

People can also nominate a charity to inherit their pension funds. If they don’t have any dependants, then the lump sum will be paid completely tax-free to the charity. This is irrespective of how much pension wealth the person had built up or their age when they died.

However, where the pension saver does have a living dependant, the trustees will need to first consider whether they are financially secure before they decide to pay any money to a charity. If the trustees are happy the dependants don’t need the money from the pension, they may agree to the charity donation.

In this situation the tax treatment of the lump sum is different. If the pension saver died before age 75, then it will be free of tax if all other tax-free lump sums paid out in life or on death are less than, usually, £1,073,100.

Any excess over this may be taxable if the charity is not exempt from tax. If the pension saver was aged 75 or over, then the entire lump sum paid to the charity will be taxed at a rate of 45%.

If the charity lump sum is to be taxed, then the pension saver could nominate someone to receive their pension funds and they then pay the money onto the charity. They will probably also have to pay tax on the lump sum, but if they are working, they could claim gift aid which may increase the amount of money the charity receives, so the charity doesn’t lose out. That said, the pension saver would have to be confident their wishes would be carried out.

Pension freedoms offer many options in terms of how to pass on your wealth. Perhaps the most important thing is to discuss these options with loved ones to make sure they know what you want to happen to your pension money after you die.

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