Answers · UK 2025/26
What is a spousal bypass trust and why use one for a pension?
A spousal bypass trust is a discretionary trust set up to receive pension death benefits on the member's death, rather than paying directly to the surviving spouse. This prevents the pension lump sum from entering the spouse's estate, avoiding IHT on the second death. It is established via an expression of wishes to the pension trustees.
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**Why pension death benefits can cause IHT issues** Pension funds are (currently) outside the estate for IHT purposes. But if pension death benefits are paid directly to a surviving spouse, those funds enter the spouse's estate and will be subject to 40% IHT on the second death if the estate exceeds the IHT threshold. Note: The UK government announced in Budget 2024 that pensions will be brought into IHT from April 2027. Confirm the current position before planning, as this is subject to legislative change. **What is a spousal bypass trust?** A spousal bypass trust is a discretionary trust that the pension member nominates to receive pension death benefits (via an expression of wishes). The trustees of the pension scheme have discretion to follow this nomination. Benefits flow to the trust rather than directly to the spouse. **How it works** 1. The pension member creates a discretionary trust (usually a standalone settlement or a scheme-specific expression of wishes form) 2. The expression of wishes directs the pension trustees to pay death benefits to the discretionary trust 3. On death, funds are paid to the trust (not the spouse directly) 4. The trust then distributes income or capital to the spouse as needed — without the funds forming part of the estate 5. On the spouse's death, remaining trust funds pass to other beneficiaries (children) without IHT (trust funds are not part of the spouse's estate) **Example: David and Emma** David has a £500,000 pension. His estate (excluding pension) is already near the IHT threshold. He nominates a spousal bypass trust. On his death: - £500,000 goes to the trust - Emma is a discretionary beneficiary — trustees can distribute income/capital for her needs - When Emma dies, the remaining trust fund passes to children: **no IHT** in Emma's estate Without the trust: £500,000 into Emma's estate → potentially £200,000 IHT on her death. **Complexities** The pension trustees are not legally bound by the expression of wishes. They must exercise their own judgment. Spousal bypass trusts should be set up with advice from a qualified financial planner and solicitor.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.