Putting Pension Death Benefits Into Trust: Does It Still Reduce Inheritance Tax After 2027?

Important — regulatory boundary
Any advice on your investments, personal pension and/or annuity is an FCA regulated area of advice, which is referred to our independent partner firm; it is not advised by any company within the Bluebond group.

• From 6 April 2027, most unused pension funds and lump sum death benefits are in scope for UK inheritance tax.
• Personal representatives, not pension scheme administrators, will be responsible for reporting and paying the IHT due.
• Spouse and charity exemptions still apply where benefits pass directly to a surviving spouse or charity.
• A spousal bypass trust no longer routes pension funds around your IHT estate but still helps with second-generation planning.
• Reviewing nominations, expressions of wishes, and trust documents before April 2027 is the highest-leverage step.

Pension death benefits. Sums paid from a pension scheme on the member’s death, as a lump sum or ongoing income to a nominated beneficiary.

Spousal bypass trust. A discretionary trust nominated to receive pension death benefits, typically for the surviving spouse and other family members.

Expression of wishes. Your written guidance to the pension scheme administrator about who should receive your death benefits. Not legally binding.

Personal representatives. The executors or administrators responsible for dealing with your estate when you die, including filing IHT400.

From 6 April 2027, most unused pension funds and lump sum death benefits will be included in the value of your estate for inheritance tax. This was confirmed by HM Treasury in the July 2025 consultation response, following the announcement at the Autumn Budget 2024.

Before the reform, pension death benefits paid under discretionary scheme trusts typically fell outside your estate. After April 2027, those benefits aggregate with the rest of your estate and are taxed at 40% above any available nil-rate band of £325,000, valid for the 2026/27 tax year. Personal representatives, not the pension scheme administrator, become responsible for reporting the IHT due.

A spousal bypass trust no longer reduces inheritance tax at the first death in the way it once did. Pension death benefits paid to a bypass trust do not qualify for the spouse exemption because the recipient is a trust, not the surviving spouse. The trust attracts the standard 40%  IHT charge above the available nil-rate band.

The trust still has a role for the second generation. Funds held in a discretionary trust sit outside your spouse’s estate, so they are not taxed again on the second death. For families with adult children or vulnerable beneficiaries, that protection often outweighs the lost spouse exemption at the first transfer.

Once pension death benefits are taxed inside your estate at 4%, the post-tax funds can sit in a discretionary trust for your children or grandchildren. The trust shields those funds from being taxed again when each beneficiary dies, provided the trust is properly drafted and managed.

The trust pays its own ten-year periodic charge of up to 6% on value above its nil-rate band under Sections 64 and 65 of the Inheritance Tax Act 1984. That is well below the 40% which would apply on each beneficiary’s death if they held the funds outright. For larger pots and blended families, the trust route still adds value.

The spouse exemption under Section 18 of the Inheritance Tax Act 1984 continues to apply where pension death benefits pass directly to a surviving spouse or civil partner. The charity exemption under Section 23 also continues to apply where benefits pass to a registered UK charity. These two exemptions are the cleanest IHT shelters that survive the reform, according to HMRC guidance.

Routing benefits to a spouse defers IHT to the second death. Routing benefits to charity removes them from the IHT calculation. Where 10% or more of your net estate goes to charity, the IHT rate on the rest of your estate falls from 40% to 36%.

Review your expression of wishes on every pension scheme, your nominated beneficiary on each life policy, and any existing bypass trust deed. These documents were drafted in a different tax environment and may send funds into structures that no longer match your IHT objectives. An hour on a clean review now is worth more than any step taken after 6 April 2027.

The popular headline is that spousal bypass trusts are dead. They are not. They lose their first-death IHT advantage but remain a strong vehicle for control, asset protection, and second-generation planning. The mistake is to dismantle a working structure on a headline rather than a calculation.

This is one reason 19 out of 20 Bluebond clients legitimately pay zero inheritance tax. We test each existing trust against the post-2027 rules and recalculate combined IHT over two deaths before recommending changes. The reform changed the inputs, not the value of good planning.

1. Review your expression of wishes on each pension scheme.
2. Identify which beneficiaries are spouses and the intended split.
3. Estimate IHT exposure if all benefits fell into your estate today.
4. Decide whether each existing bypass trust still serves your wider plan.
5. Confirm executors understand the April 2027 reporting obligation.
6. Align pension nominations, will, and trust documents into one plan.

• Assuming pension death benefits will continue to fall outside your IHT estate after April 2027.
• Treating the spouse exemption as automatic when benefits are paid to a trust rather than directly to a spouse.
• Leaving your expression of wishes unreviewed from before the reform.
• Dismantling an existing bypass trust without recalculating combined IHT over two deaths.
• Forgetting that personal representatives, not the pension provider, become liable for IHT reporting from April 2027.

Most unused pension funds and lump sum death benefits will be in scope from 6 April 2027. Benefits passing directly to a surviving spouse or civil partner remain exempt under the spouse exemption. Benefits passing to a registered UK charity remain exempt under the charity exemption.

No. The spouse exemption applies only where benefits pass directly to your surviving spouse or civil partner. A bypass trust is a separate legal entity, so the exemption does not apply on the first transfer. The benefits attract IHT at 40 percent above the available nil-rate band.

Not without a full review. The trust may still add value through second-generation IHT efficiency, asset protection, and beneficiary control. The right answer depends on the pension size, the family circumstances, and how much the spouse will need from the funds.

The April 2027 reform changes how pension death benefits interact with IHT, not whether planning is worth doing. You should carry out a review of how your assets are held and structured to highlight potential tax savings. You should engage with a firm that can give you financial planning, tax advice, legal advice and accountancy advice under one client relationship, with regulated financial advice referred to our independent FCA-authorised partner firm and legal drafting handled by qualified solicitors employed within our business.  You should work with advisers who coordinate financial planning, tax advice and legal work under one client relationship — with clear disclosure of who is regulated for what. Bluebond Tax Planning Ltd provides tax planning and coordination only; any advice on your investments, personal pension or annuity is FCA-regulated and referred to our independent partner firm — no company in the Bluebond group is FCA-authorised or an SRA-authorised law firm. Individual outcomes depend on personal circumstances and cannot be guaranteed. If you need any help or advice in this complex area please contact us. We will help you mitigate your inheritance tax.
The Bluebond IHT Mitigation Plan recalculates your combined family IHT under the new rules and shows where existing bypass trusts, nominations, and wills need to change. The free Bluebond webinar walks through the 6 April 2027 changes and the practical steps to take before they land.

Any advice on your investments, personal pension and or annuity is a FCA regulated area of advice which will be referred to our separate independent financial advice firm and are not advised by any company within the Bluebond group.

Important — regulatory boundary
Any advice on your investments, personal pension and/or annuity is an FCA regulated area of advice, which is referred to our independent partner firm; it is not advised by any company within the Bluebond group.

Disclaimer. The information in this article is general in nature and does not constitute personal financial, tax, or legal advice. UK tax legislation changes frequently, and the specific application of any rule or strategy depends on individual circumstances. Figures, thresholds, and reliefs mentioned are correct as of the 2026 to 2027 tax year unless otherwise stated. Before acting on any information here, consult a qualified adviser who has reviewed your full situation. Bluebond Tax Planning provides personal recommendations only under a signed client agreement, following a full review. Bluebond Tax Planning operates under UK legal frameworks and recognised professional conduct standards. Tax planning and legal work are not FCA regulated.