Spend down, gift, insure or bypass: quantifying the April 2027 options

Once most unused pension value is counted in the estate from April 2027, the natural question is “what can be done about it?”. Four answers come up again and again — spend it down, gift it, insure the bill, or use a bypass trust — and it is easy to assume they are interchangeable. They are not. Each changes a different thing. The clearest way to see that is to hold everything else steady, change one thing at a time and look at the difference. This guide describes the effects; it does not pick a winner.

Four options, four different effects

Spend down. Pension money genuinely spent on living costs is no longer there to be taxed at death. But a withdrawal that is saved, invested or used to buy something else has simply moved from the pension into the rest of the estate — where it is still taxed. And the withdrawal itself can trigger income tax. So “reducing the pension” and “reducing the estate” are not the same thing.

Gift withdrawn funds. A gift that is truly given away can lower the value left at death — but two other things come into play. The withdrawal can carry income tax, and the gift then falls under the ordinary rules on lifetime gifts. HMRC has confirmed the pension change does not touch those rules, so the usual exemptions, the seven-year clock and any “normal expenditure out of income” claim all still turn on the facts. The calculator’s pension figure is not a verdict on the gift’s tax.

Insure the liability. Insurance does something different again: it can put cash in place to pay the bill when it falls due, without shrinking the taxable pension or the inheritance tax itself. Whether it works depends on who owns the policy, any trust, the premiums and the underwriting — separate legal and product questions, not a number the pension-IHT calculation produces.

Use a bypass trust. Royal London’s technical guide confirms that sending a pension death benefit to a bypass trust does not keep it out of the new inheritance tax at the first death. A trust can change who controls the money later, and how it is taxed after that — but that is a second-stage question. It does not undo Finance Act 2026 when the member dies.

Comparing the options without tipping into advice

The neutral way to do this is to start from one clear baseline, change a single supported input at a time, and read off how the pension value, estate value, residence nil-rate band, inheritance tax and net figure move. Keep the four in the same order each time. Anything that sits outside the pension maths — income tax, whether a gift survives seven years, insurance proceeds, trust taxation — is shown on its own or flagged as out of scope, never buried inside the pension figure.

Start with the Pension IHT calculator’s supported baseline; it does not model every gift, policy or trust question. The governing context is in pensions, death benefits and inheritance tax and pensions and inheritance tax from April 2027. For planning and illustration only. This comparison describes effects; it does not recommend a transaction, product, recipient or trust.

Finance Act 2026 · HMRC “Inheritance Tax on pensions” technical note §11.2.5 · GOV.UK inheritance-tax gifts guidance · Royal London · abrdn