Despite the headline grabbing relaxations to pension death benefit charges, the Chancellor has missed an opportunity in the Autumn Statement to help the UK's hard pressed charities sector. The underlying principle behind the proposed reforms is to provide individuals with greater flexibility about how their pension benefits are applied in retirement and how they should be distributed on death. However, the Treasury has confirmed to us that the current restrictions on making payments to charities on death will remain. The direct result of this policy decision must be that the tax inefficiencies of donating to charity created by the proposed reforms will dissuade many pension savers from using at least part of their pension savings to make donations to charity, and instead encourages greater intergenerational transfers.
Current restrictions mean that distributions to charities of pension benefits on death are subject to a special lump sum death benefit charge of 55% (although it will reduce to 45% under the reforms) where the individual in respect of whom the payment is made has any dependants alive at the time of their death. This is even if the pension scheme prohibits distributions to dependants, or if provision has already been made to the individual's dependants or the dependants don't want the benefit. This is in contrast to when an individual has no dependants, in which case the charities can receive the distribution tax free. If the driving force behind the reforms is about greater individual pension flexibility, it seems odd to keep this arbitrary distinction for charities that results in such a penal tax charge being applied.
When you consider that the new 45% special lump sum death benefit charge will be substantially higher than the other proposed pension tax charges on death - potentially no tax charges where death occurs before age 75, and a tax charge of the recipient's marginal rate where death occurs after age 75 - it seems highly unlikely that people will use their often substantial pension savings to make provisions for charity. While many have focussed upon the potential losses to the Treasury of introducing a relaxation to the pension death benefit charges, the ultimate loser created by the proposed reforms must be the UK charities sector, who are less likely than ever to benefit from an individual's pension savings.
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