Guide Pilot trusts and death benefits

For many years, pilot trusts (often referred to as spousal bypass trusts, as they’re commonly used for this purpose) have been a popular destination for pension lump sum death benefits. Pilot trusts hold a nominal amount and normally stay dormant for future use. They allow the trustees (which could, for example, include a spouse, a civil partner, children and grandchildren) to have control in accessing and distributing the pension funds at their discretion without actually adding the funds to a spouse’s estate and causing a possible IHT problem further down the line. The death benefit flexibility now available, in particular the ability to pass funds down the generations within a tax-advantaged registered pension scheme, meant that pilot trusts became less popular. However, when IHT starts to apply to unused pension funds from 6 April 2027, lump sum payments made into a pilot trust on death will be in scope and included in the member's IHT calculation. This means that pilot trusts could still be useful. 

Clients with existing pilot trusts may wish to regularly review their continued suitability in the run up to age 75 and beyond, in view of the death benefit options available. If the trust is no longer suitable the client can change a death benefit nomination in favour of other beneficiaries and the trustees can exercise their powers to distribute the nominal amount used to create the trust to one or more of the beneficiaries, leaving the trust with no value.

Even though the funds held in a pilot trust are subject to the discretionary trust tax rules and therefore possibly subject to IHT periodic and exit charges, there are many examples where such a trust could still be appropriate as an alternative to keeping pension benefits within a registered pension scheme. For example, if there is a wish to have much more control in how assets are used, if there are complex family relationships, where the proposed beneficiaries are minors, and so on.