Following recent changes to the pension rules, are Spousal Bypass Trusts a thing of the past, or do they still have their uses? We explore the new landscape.

It has been suggested that the recent changes to pension rules, which afford greater flexibility in the choice of beneficiaries and method of withdrawal following the member’s death, signal the end of Spousal Bypass Trusts. However, as with Mark Twain, reports of their death may be exaggerated.

A Spousal Bypass Trust may still be beneficial if a member wanted to have some control over where their pension benefits go after their death. Having the funds paid into a Spousal Bypass Trust, accessible by trustees who have been appointed by the member via a letter of wishes, is an effective method of controlling who gets what. This method may be particularly useful in, for example, the case of a second marriage where the deceased wishes to benefit their surviving spouse initially but thereafter children from the first marriage.

However, in the majority of cases, that ability is likely to be outweighed by the tax advantages of keeping the funds in the pension wrapper. If a person dies before the age of 75 and the benefits remain in the pension wrapper, they will pass on funds to their nominated beneficiaries, e.g. spouse and/or children, tax free. In addition, any income and gains earned on the funds while remaining in the wrapper will have been free of tax during that period.

If they had been paid out to a bypass trust, although that too would have been tax free in itself, income and gains would then be subject to highest rates of tax and there would be 10 year and exit charges under IHT to satisfy.

If a person is over the age of 75 when they die, as from 6 April 2016, the monies paid out to the nominated beneficiaries will be subject to tax at their marginal income tax rates. It will be possible therefore to pay out in such a fashion that only basic rate tax will be payable.

In contrast, a payment into a bypass trust will be subject to a tax charge of 45%.

The new rules are such that this new tax sheltering can be continued beyond the life of the surviving spouse. If he or she dies before the age of 75, the funds can also be paid as lump sums and/or income free of tax to whoever has been nominated. For those aged 75 or older, tax will be paid at the marginal rates of the nominee.

As always, there is no right answer for all cases. It depends upon the individual’s own circumstances.