Gifting money to your family can be a generous and meaningful way to support loved ones, whether it’s helping them purchase a home, fund an education, or simply ease their financial burdens. For many, their pension is a significant asset that could potentially provide the funds for such gifts. However, while it’s natural to want to share your wealth, it’s equally important to consider the long-term impact on your own financial security and the potential implications for inheritance tax (IHT) and estate planning.
In this article, we’ll explore whether you can gift money to your family from your pension, how to do so within the rules, and what to consider to ensure your generosity doesn’t unintentionally affect your retirement plans or your estate’s tax efficiency.
So, can you gift money to your family from your pension?
In short, yes. Yes, you can. Gifts are usually tax-free if they fall within your annual exemption of £3,000 per year.
You can gift up to £3,000 each tax year, either to one person or split between multiple recipients.
If you don’t use your full £3,000 annual exemption, you can carry the unused amount forward to the next tax year - but only for one year.
Furthermore, there is a small gift allowance. You can give an unlimited number of gifts up to £250 per person each tax year, provided you haven’t used another allowance for the same individual.
Additionally, birthday or Christmas gifts made from your regular income are exempt from Inheritance Tax.
Check whether your pension scheme allows withdrawals or lump sums that could be used for gifting. Some pensions may have restrictions based on your age or type of plan.
Pension withdrawals may count as taxable income. If you withdraw money to gift, you might face an income tax bill, reducing the amount available to give.
Pension Type
If you have a Defined Contribution pension, you can often take lump sums, subject to taxation, which you could use for gifting.
However, if you have a Defined Benefit pension then these typically provide a regular income and may not allow large withdrawals for gifts.
Ensure that gifting money doesn’t compromise your ability to meet your own financial needs in retirement. Consider consulting a financial adviser, such as Reeves Independent, to assess your long-term financial security.
Previously, pensions were not included in your estate for IHT purposes. Therefore, withdrawing to gift might not have been the most tax-efficient option. However, in the 2024 Autumn Budget, Chancellor Rachel Reeves revealed that, starting from 6 April 2027, unused pension savings could be counted as part of your estate for Inheritance Tax (IHT) purposes. As such gifting money from your pension may now be seen as a more viable option. That said, funds retained within pension can still offer greater flexibility for estate planning than funds held in other assets and investments.
What about giving money to my spouse or civil partner?
There is no Inheritance Tax on gifts made to your spouse or civil partner, regardless of the amount, as long as they permanently reside in the UK and are legally married to you or in a registered civil partnership with you
Additionally, gifts to charities or political parties are entirely free from Inheritance Tax.
Speaking of marriage, you can also make a tax-free gift to someone who is getting married or entering into a civil partnership.
As a tax-free wedding present, you can gift £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anyone else.
If you're giving gifts to the same person, you can combine the wedding gift allowance with other exemptions, except for the small gift allowance.
For example, you could give your child a wedding gift of £5,000 and an additional £3,000 using your annual exemption within the same tax year.
The seven-year rule
It is important to understand the seven-year rule. No tax is due on gifts you give if you live for at least seven years after making them - unless the gift is part of a trust. This is referred to as the ‘seven-year rule.’
Gifts given within seven years of your death may be subject to tax, depending on who the gift was given to and their relationship to you. Furthermore, it also depends on the value of the gift and the timing of the gift in relation to your death.
If you pass away within seven years of giving a gift and Inheritance Tax (IHT) applies, the tax rate depends on how long before your death the gift was made. Gifts given within three years of your death are taxed at the full IHT rate of 40%. Gifts made between three and seven years before your death may be taxed at reduced rates, according to a sliding scale called ‘taper relief.’
It’s important to note that taper relief only applies if the total value of gifts made in the seven years before your death exceeds the £325,000 tax-free threshold.
We’ve written an article titled Navigating Risks and Protections in Your Retirement Savings, which provides valuable insights into how to safeguard your pension and manage potential risks. We encourage you to take a look at the article to learn more about the steps you can take to protect your retirement savings and ensure financial security in the future.
Is there anything else to bear in mind when gifting to family?
You can make regular payments to someone, such as helping with their living costs, with no limit on how much you can give tax-free, if you can afford the payments after covering your own living expenses and you make the payments from your regular monthly income.
These payments are considered ‘normal expenditure out of income’ and can include paying rent for your child, contributing to a savings account for a child under 18 and providing financial support to an elderly relative.
If you're gifting to the same person, you can combine ‘normal expenditure out of income’ with other allowances, except for the small gift allowance.
For example, you could give your child a regular payment of £60 per month (totalling £720 a year) alongside your annual exemption of £3,000 in the same tax year.
In conclusion, while gifting money to your family from your pension can be a thoughtful way to support loved ones, it’s important to consider the potential tax implications and long-term impact on your estate, particularly in relation to Inheritance Tax (IHT). With upcoming changes to pension savings and IHT planning, it’s crucial to stay informed and plan carefully to ensure your generosity doesn’t inadvertently reduce your financial security or increase your estate’s tax liabilities.
At Reeves Independent, we specialise in helping clients navigate the complexities of gifting, pension management, and Inheritance Tax planning. Our expert advisers can guide you through the process, offering personalised advice to ensure your gifts are tax-efficient and aligned with your long-term financial goals. Whether you’re looking to make gifts, manage your pension, or reduce your IHT exposure, we’re here to help you make informed decisions and protect your wealth for future generations.
