Gifting from pension income

With most unused pensions and pension death benefits counting for inheritance tax for deaths on or after 6 April 2027, more people are asking whether they can pass money on during their lifetime instead. One existing exemption covers regular gifts from surplus income. Outright gifts that meet its conditions can be free of inheritance tax straight away, with no seven-year wait. The pension changes do not relax those conditions.

This page covers how that exemption works with pension income. GOV.UK explains the wider rules for gifts and the seven-year rule. IHT Doctor is a separate educational brand from the same publisher, Compliant Paraplanning Services Ltd.

The three conditions

A gift is exempt as "normal expenditure out of income" if all three are true:

It's part of your normal pattern of spending. Regular gifts, such as a monthly payment to a child or yearly school fees for a grandchild, are the clearest case. A single gift can qualify if it's clearly the first of a planned series.
It's made out of income, not capital. Pension income, salary, rent and interest can count, after income tax. Gifts funded from capital, such as selling investments, do not qualify under this exemption. Accumulated income needs care: money does not remain income indefinitely simply because it originally came from earnings or a pension.
You're left with enough income to keep your usual standard of living. If the gifts leave too little income for your normal bills, the exemption is not available in full, although part of the gifts may qualify. HMRC can consider income and expenditure over more than one year where the facts justify it.

Is pension income "income"?

Regular payments from a pension annuity or a defined benefit pension are normally income. Drawdown withdrawals can also provide income, but making withdrawals regularly, or paying income tax on them, does not by itself establish that gifts qualify. HMRC considers the nature of the payments and all three conditions in each case.

Pension tax-free cash lump sums are generally capital, so gifts from them normally fall under other gift rules. Large one-off withdrawals should not be assumed to qualify as normal expenditure out of income. HMRC's definition of income for this exemption is not necessarily the same as the income-tax definition.

Example

Pat has a £28,000 a year defined benefit pension, the State Pension of £12,548 and £6,000 a year of regular, fully taxable drawdown income. That totals £46,548 before tax. With a full £12,570 Personal Allowance and no other income, income tax at 20% is £6,795.60, leaving £39,752.40. Pat's own spending is £26,000 a year. Pat sets up standing orders totalling £800 a month (£9,600 a year) to help two grandchildren with rent.

The gifts are regular.
Assume the drawdown is income for this exemption and the gifts are paid from Pat's net income.
Pat still has £4,152.40 a year of surplus after the gifts and keeps the same standard of living.

On these assumptions, the gifts can meet the exemption's conditions. Records support the claim; keeping records does not make an otherwise ineligible gift exempt. A later fall in income or rise in living costs could change the position.

Illustrative, not advice. Uses England, Wales and Northern Ireland 2026/27 income-tax rates. Scottish pension-income tax rates differ. The State Pension figure rounds the full 2026/27 rate of £241.30 a week over 52 weeks to £12,548; actual entitlement can differ. The £6,000 drawdown is assumed fully taxable, with no tax-free cash included.

Keep records

Your executors will need to prove the gifts met the conditions. HMRC's form IHT403 asks for a year-by-year table of income, spending and gifts. Keep:

a note of your intention to make regular gifts;
yearly income, tax and spending figures, with pension statements and supporting records;
each gift's date, recipient and value, supported by bank records.

A spreadsheet updated each tax year can organise this evidence. Retain the supporting documents as well, and record changes to income, gifts or living costs.

Other exemptions worth knowing

Annual exemption: £3,000 in total each tax year. Unused exemption can be carried forward for one tax year only, after using the current year's exemption.
Small gifts: up to £250 per person per tax year, provided you have not used another gift allowance for that person.
Wedding or civil partnership gifts: up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to anyone else, subject to the qualifying conditions.
Gifts to a spouse or civil partner and to qualifying charities normally have separate exemptions. Cross-border residence circumstances can restrict the spouse exemption.

FAQ

Can I give away my pension income tax-free? Regular gifts from surplus income, including qualifying pension income, can be free of inheritance tax if all three conditions above are met. Giving the money away does not remove any income tax due when you withdraw it from the pension.

Does tax-free cash count as income for gifting? Usually not. Tax-free lump sums are generally treated as capital, so gifts from them fall under the normal gift rules.

Do I need to tell HMRC when I make gifts? There is normally no immediate inheritance-tax report for an ordinary outright cash gift to an individual. Your executors may need the records to establish the exemption after your death. Gifts involving trusts or other arrangements can have different reporting requirements.

Is there a limit on gifts from income? There is no fixed monetary ceiling, but the gifts must satisfy all three conditions, including leaving enough income for your usual standard of living.

Sources

General information, not a personal recommendation. Tax treatment and pension rights depend on the rules and individual circumstances.