This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
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. They allow the trustees (which could include a spouse) 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, will likely mean that pilot trusts are less popular in future and in some cases may be redundant.
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 under pension flexibility. 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.
That’s not to say pilot trusts should be completely disregarded however. 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 still 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.