Spending vs Preserving: The Permanent Charity Dilemma

There are few questions that follow trustees around quite as persistently as this one: how much should we spend today, and how much should we preserve for tomorrow?

For charities with permanent capital, the answer is rarely straightforward. It sits behind investment reports and annual budgets, sometimes quietly, sometimes rather pointedly. In periods of economic pressure, it moves from background consideration to the centre of the boardroom table.

Few trustees arrive at their role expecting to become amateur macroeconomists, yet inflation has a habit of forcing the issue.

Recent years have provided exactly that reminder. Inflation has tested assumptions that felt stable for much of the previous decade. Fundraising conditions are uneven. Demand for charitable services continues to grow. In that context, holding substantial reserves can feel uneasy. At the same time, drawing too heavily on capital risks weakening the foundation that sustains the charity over the long term.

Trustees of permanent endowment are, in effect, serving two sets of beneficiaries: those in front of them today and those who have yet to appear. The discipline lies in treating both fairly.

Inflation and the gradual erosion of real value

UK CPI reached 11.1% in October 2022, the highest rate in over forty years, before moderating through 2023 and 2024. Even at lower levels, inflation continues to exert steady pressure on real spending power.

If a charity distributes 4% annually while inflation runs at 4%, the real value of capital is preserved only if investment returns exceed both spending and inflation combined. Where returns fall short for a sustained period, future spending power diminishes gradually.

Many permanent charities operate with spending policies in the region of 3–5% per annum. The sustainability of that range depends heavily on long-term real return expectations. A portfolio expected to generate 3–4% real returns over the cycle cannot support 5% distributions indefinitely without some erosion.

That erosion is rarely dramatic, nominal portfolio values may appear stable or even positive. In real terms, however, purchasing power can decline quietly. Meanwhile, charities face higher wage bills, increased energy costs and rising service delivery expenses. In such an environment, standing still is rarely neutral.

Understanding the nature of the capital

Before revisiting spending rates, trustees need clarity on the structure of the funds they are stewarding.

Permanent endowment is typically subject to legal restrictions requiring the real value of capital to be maintained over time, supported by total return regulations and Charity Commission guidance. Quasi-endowment, by contrast, is internally designated and allows trustees greater discretion should circumstances warrant drawing on capital.

The distinction shapes the flexibility available to a board and frames how intergenerational equity is interpreted in practice. Decisions taken in the present inevitably influence beneficiaries who will not appear in this year’s annual report.

Investment returns as the bridge

Investment strategy forms the link between present need and future sustainability.

Over extended periods, global equities have delivered nominal returns in the region of 7–10% per annum, albeit with considerable variability along the way. Multi-asset portfolios seek to moderate that variability through diversification, combining growth assets with more defensive exposures. For most permanent charities, the objective is sustainable real growth within a level of volatility that trustees can tolerate, rather than pursuing maximum return.

The total return approach allows trustees to focus on overall portfolio growth and draw distributions from both income and capital appreciation, provided the real value of the endowment is maintained over time. Used thoughtfully, it provides flexibility. Used incautiously, it can mask gradual erosion.

Many endowments adopt smoothing mechanisms when setting spending rates, often averaging portfolio values over three to five years. This reduces the temptation to increase distributions after strong markets or cut sharply during downturns. It also encourages decisions grounded in long-term expectations rather than short-term movements.

Whilst markets are cyclical, spending policies benefit from steadier rhythms.

The risks at either extreme

Spending beyond what long-term returns can reasonably support carries consequences that unfold slowly rather than dramatically. Real capital may decline and future income generation may soften. The charity may become more reliant on fundraising at precisely the moment markets are least accommodating.

The mathematics of compounding are rarely emotional, but they are consistent.

Excessive caution presents its own challenges. Accumulating capital while beneficiary need is acute can prompt difficult conversations with donors, regulators and, occasionally, trustees themselves. The Charity Commission has consistently emphasised the importance of explaining why reserves are held and how they further charitable purposes.

The task is not to choose one end of the spectrum, rather the aim should be to avoid drifting towards either extreme through habit, optimism or anxiety.

Alignment and discipline

A sustainable spending rate cannot be determined in isolation from the portfolio designed to support it.

A higher distribution target requires confidence in long-term real return assumptions and an acceptance of volatility. Conversely, a more conservative investment approach constrains what can be distributed without eroding capital over time.

Where expectations and portfolio construction are misaligned, tension eventually surfaces. Over extended periods, arithmetic has a habit of asserting itself.

In our experience, charities that fare best are those that adopt clear, pre-defined frameworks linking spending policy to long-term real return assumptions and review them periodically rather than reactively. Stability does not imply rigidity, but it does mean resisting the urge to recalibrate at every market turn.

A responsibility that endures

The balance between spending and preserving is unlikely ever to feel entirely settled. That discomfort is part of the responsibility attached to permanent capital.

Periods of economic strain may heighten the pressure to act decisively, whether by increasing distributions to meet urgent need or tightening policy to safeguard the future. Reactive shifts, however, rarely solve structural challenges. Measured frameworks, grounded in realistic return expectations and clear alignment between spending policy and investment strategy, tend to serve charities more effectively over time.

Permanent capital offers a rare privilege: the ability to support beneficiaries today while maintaining the capacity to do so tomorrow. Stewarding that privilege with clarity, discipline and perspective remains one of trustees’ most important tasks.