Discretionary pension trusts and the 2027 inheritance tax changes explained

Here is the short answer. Most UK pension schemes pay death benefits under a discretionary trust: the scheme's trustees or administrator, not you, decide who receives your unused pension when you die. Because you have no fixed right to the money, HMRC does not currently count it as part of your estate, which is why pensions have largely escaped inheritance tax. From 6 April 2027 that protection ends. Under the reform confirmed in the government's Inheritance Tax on pensions consultation outcome, most unused pension funds and death benefits will be brought into the estate for inheritance tax whether or not the scheme keeps its discretion.

In other words, "my pension is in a discretionary trust, so it is safe from inheritance tax" is a belief with an expiry date. It is broadly true today and broadly false from 6 April 2027. If you want to see what the change could mean for your own estate, our free pensions and IHT 2027 estimator works out your likely exposure in about two minutes. This guide applies UK wide (inheritance tax is a UK tax), is written for England and Wales terminology, and is general information, not financial, tax or legal advice.

Why a discretionary trust kept your pension out of the estate

Inheritance tax is charged on your estate: broadly, everything you own or have a right to at death, less what you owe. The key phrase is "have a right to". Most modern workplace and personal pensions are written so that death benefits are paid at the discretion of the trustees or scheme administrator. You can fill in an expression of wish form saying who you would like to benefit, and trustees almost always follow it, but they are not legally bound by it.

That lack of a binding entitlement is the whole trick. Because you cannot compel the scheme to pay your unused pension to your estate or to a named person, HMRC's long-standing position, set out in its Inheritance Tax Manual, is that the money is not "yours" for estate purposes. It sits outside the estate, passes outside your will and outside probate, and under current rules usually attracts no inheritance tax at all. Schemes did not adopt this structure by accident: it also lets them pay bereaved families quickly, without waiting for a grant of probate. For a fuller picture of how death benefits are taxed today, see our companion guide to the current rules on pension death benefit tax.

What changes on 6 April 2027

From 6 April 2027, the government's policy paper on unused pension funds and death benefits brings most unused pension funds and death benefits into the value of the estate for inheritance tax. Crucially, the legislation does this regardless of whether the scheme retains discretion over who receives the money. Discretion no longer determines the inheritance tax outcome. Whether your scheme pays benefits at the trustees' discretion or at your direction, the value is counted.

The headline features of the new regime, all confirmed in the consultation outcome:

• Effective date: deaths on or after 6 April 2027.
• Who is responsible: personal representatives (your executors) become legally responsible for reporting and paying any inheritance tax due on pension funds, not the pension scheme.
• Funding the bill: up to 50% of the pension amount can be withheld by the scheme for up to 15 months to help pay the inheritance tax attributable to it.
• Key exclusion: death in service benefits from registered pension schemes are excluded from the charge. We cover this contrast in detail in our guide to death in service benefits and the 2027 rules.
• Spouse exemption continues: pension funds passing to a spouse or civil partner remain exempt, exactly as other assets passing between spouses are.

HMRC estimates that around 10,500 estates a year will become newly liable to inheritance tax because of this change, and a further 38,500 estates will pay more than they otherwise would, with an average increase of around £34,000. Our pensions and inheritance tax 2027 research hub tracks the published figures and how the reform interacts with frozen thresholds.

Discretionary versus direction: the distinction that used to matter

Under current law, the tax treatment of a pension death benefit turns heavily on whether it is paid under discretion or under a binding direction. From April 2027 that distinction stops driving the estate inclusion question, though it still affects practicalities like probate and speed of payment.

	Discretionary death benefits	Directed (binding nomination) benefits
Who decides the recipient	Scheme trustees or administrator, guided by your expression of wish	You, via a binding nomination or your will; the scheme must follow it
In your estate before 6 April 2027?	Generally no, because you have no fixed entitlement	Generally yes, because the benefit is yours to direct
In your estate from 6 April 2027?	Yes, for most unused funds and death benefits	Yes, for most unused funds and death benefits
Passes through probate?	No, paid directly by the scheme	Sometimes, depending on how the benefit is written
Spouse exemption available?	Yes, where the money in fact passes to a spouse or civil partner	Yes, where directed to a spouse or civil partner

Notice the pattern in the middle rows: before 2027 the two columns give different answers, from 2027 they give the same one. That is the entire reform in one table. Note also that "paid outside probate" does not mean "outside inheritance tax" from 2027. Executors must count the value even though the money never passes through their hands, which is a genuinely new administrative burden. If you are, or expect to be, an executor, the pension holders and 2027 hub collects the guides relevant to both sides of that task.

Spousal bypass trusts: what they did, and what is left

A spousal bypass trust is a discretionary trust you establish yourself during your lifetime, then nominate to the pension scheme as the intended recipient of your death benefits. Instead of the scheme paying your spouse or children directly, it pays the trust, and your chosen trustees then apply the money for your family under the trust's terms.

Before the reform, the appeal was mainly a tax one. Death benefits paid into the bypass trust did not join the surviving spouse's estate, so the same money could support the survivor during their lifetime without being taxed again at 40% on their later death. The trust also offered control: useful in second marriages, where a member wanted to support a current spouse but ultimately pass capital to children from a first marriage, or where a beneficiary was vulnerable, bankrupt or going through a divorce.

From 6 April 2027 the picture changes in three factual ways:

1. No escape from the estate charge. The pension funds are counted in the member's estate at death whether they are destined for a spouse, children or a bypass trust. The trust does not avoid the 2027 inclusion.
2. No spouse exemption inside the trust. Money paid to a discretionary bypass trust is not treated as passing to the spouse, even if the spouse is the main beneficiary in practice. Benefits paid directly to a spouse or civil partner are exempt; the same benefits routed through a bypass trust generally are not.
3. Possible extra trust charges. Once funds sit in a bypass trust they are usually relevant property, so the trust can face ten-yearly and exit charges under the ordinary trust regime, layered on top of any estate charge already paid. Our guide to the inheritance tax pillar explains how these trust charges fit into the wider system.

What remains is the non-tax function: control over who benefits, in what shares, and when. A bypass trust can still keep death benefits out of a survivor's divorce or care fee assessment arguments, still protect a vulnerable beneficiary, and still ring-fence capital for children of a first marriage. Whether that control is worth the trust's running costs and its new tax friction is a personal question. We describe the structure factually here and make no recommendation either way; decisions about pension death benefit nominations and trusts should be taken with regulated financial advice.

What this means for your expression of wish form

The humble expression of wish form quietly becomes a tax document from 2027. It still does not bind discretionary trustees, but because the destination of the money now determines whether the spouse exemption applies, an out of date nomination can create a real inheritance tax cost, not just an awkward outcome. A form still pointing at a former spouse, a deceased parent or a bypass trust set up under the old rules deserves a review before April 2027. The same review should take in your will and your overall estate value against the frozen thresholds, which our guide to the UK inheritance tax threshold sets out in full. For the reform as a whole, from scope to reporting mechanics, see the complete 2027 pension IHT reform guide.

Three practical checks anyone with a pension can make now, none of which involves moving any money:

1. Find your expression of wish forms for every pension you hold, including old workplace schemes, and check the named beneficiaries are still right.
2. Ask each scheme how your death benefits are paid: at discretion, under a binding nomination, or to a trust you previously nominated.
3. Estimate your combined estate including pensions, since from 2027 the pension value stacks on top of your home and savings against the same frozen allowances. The pensions and IHT 2027 estimator does this arithmetic for you.

Speak to a specialist

The 2027 reform turns a structure most people never think about, the discretionary trust inside their pension scheme, into a live estate planning question. If your pension is a significant part of your wealth, or you have a bypass trust or an old nomination in place, it is worth having your position reviewed by a regulated financial adviser and, where wills and trusts need updating, a qualified professional. We are an information and calculator service, not a law firm, and we can connect you with vetted specialists who deal with pension death benefits and estate planning every week.