April 2027 is coming: what professionals need to know about retirement, death, and spousal bypass trusts

Introduction

The upcoming changes to the inheritance tax (IHT) treatment of defined contribution (DC) pension pots, effective from 6 April 2027, are now well known among financial planners and many clients. Since their initial announcement in the 2024 Budget and subsequent clarification in the July 2025 Draft Legislation, these reforms have been widely discussed.

While the legislative changes themselves are relatively clear, the real challenge—and opportunity—for financial planners lies in helping clients make informed, tailored decisions. This will be an ongoing process as financial plans are adjusted to reflect the new landscape.

This article examines two key areas:

• The viability of spousal bypass trusts both before and after the 2027 pension and IHT changes.
• Planning considerations when a pension member dies before 6 April 2027.

As always, these are individual advice decisions, dependent on each client’s unique circumstances. However, several important considerations should be part of the process.

Spousal Bypass Trusts from 6 April 2027

A spousal bypass trust is simply a discretionary trust designed to potentially receive pension death benefits. Depending on the nature of the scheme, it is common that the pension itself is not transferred into the trust during the member’s lifetime; instead, the trust is nominated as a potential beneficiary via an expression of wish form.

There are however some schemes with an integrated trust which would not need a nomination and understanding your client’s scheme is vital.

Historically, spousal bypass trusts were widely used to keep death benefits outside the survivor’s IHT estate, while also providing the control and protection associated with discretionary trusts. Although their popularity waned somewhat following the introduction of pension freedoms, they have remained a valuable planning tool for clients seeking both control and asset protection.

Impact of the 2027 Pension and IHT Changes

From 6 April 2027, payments to a spousal bypass trust will be assessed to IHT and not benefit from the spousal exemption (even if the spouse is a potential beneficiary). Where a surviving spouse exists, it may be more advantageous to pass death benefits directly to them, deferring IHT until the second death and allowing more time for further planning.

The age of the pension member at death is also critical. If death occurs on or after age 75, payments to a trust will be taxed at the 45% income tax rate. This could result in a scenario where death benefits are first reduced by 40% IHT, with the net amount then subject to 45% income tax.

However, some or all of the 45% income tax may be reclaimable by beneficiaries, depending on their individual tax positions on distribution.

Non-Tax Benefits

Beyond tax considerations, discretionary trusts offer significant non-tax advantages. They provide control and protection for assets accumulated over a lifetime, addressing concerns such as divorce, bankruptcy, or financially irresponsible beneficiaries.

Considerations for Planners

Where there is no surviving spouse and the pension member dies before age 75, a spousal bypass trust can be an effective means of protecting intergenerational wealth. Once assets are inside the trust, they are excluded from the IHT estate of the potential beneficiaries, offering multi-generational IHT advantages.

It is important to note that pension schemes are not obligated to follow the expression of wish, even if a spousal bypass trust is nominated. Given the unpredictability of death, future circumstances, and potential changes to pension tax rules, it is generally prudent to create and nominate a spousal bypass trust—alongside other individual beneficiaries—to preserve flexibility.

There are few certainties in pension death benefit planning, but ensuring all potential options remain available, including the use of a spousal bypass trust, is essential. It is better to have the option and not need it than to need it and not have it.

Death Before 6 April 2027

Some pension members will inevitably die before 6 April 2027, while DC pensions remain outside the scope of IHT. What should planners consider in these cases?

Prior to the IHT changes announced in the 2024 Budget, it was common to retain a deceased member’s pension in a dependant’s drawdown for the surviving spouse. Under the pre-April 2027 rules, the pension value remained free of IHT, retained its tax-efficient wrapper, and provided full access to the beneficiary.

However, this approach now carries the risk of an IHT charge if the surviving spouse lives beyond 5 April 2027 with the pension still intact. What else could they consider?

Spousal Bypass Trust:

• If a trust has been established, funds can be passed to it on death, keeping assets outside the surviving spouse’s IHT estate—even if their death occurs after 5 April 2027. No IHT charge applies if the first death occurs before 6 April 2027.
• Income Tax and IHT Considerations: If death occurs after age 75, the 45% income tax rate on trusts applies. Discretionary trusts are also subject to periodic and exit charges, unlike dependant’s drawdown arrangements.

Dependant’s Drawdown:

• Retaining the pension wrapper and drawing income over several years may allow gifts under the normal expenditure out of income exemption.

Direct Payment to Spouse:

• Passing death benefits directly to the surviving spouse enables them to undertake flexible IHT planning in their own right.

Direct Payment to Next Generation:

• If the surviving spouse does not require the funds, benefits can be passed directly to the next generation.

As with spousal bypass trusts, ensuring all appropriate options are available by updating expression of wish forms and naming suitable beneficiaries is a practical step that can be taken today. For example, some clients may have nominated someone other than their spouse to take account of the IHT exemption until 6 April 2027. It may be prudent to re-consider this in light of the forthcoming changes.

Conclusion

As with all areas of financial planning, there are numerous potential strategies, and the optimal outcome will depend on each client’s specific circumstances. Holistic, proactive planning will ensure clients receive maximum value and the best possible outcomes in light of the forthcoming changes.