Whilst your accumulating pension fund or death in service lump sum may not be taxable on your death, if it is paid directly to your spouse or civil partner, this will inflate the value of their taxable estate, so the benefits will eventually become liable to inheritance tax on the second death. By asking your pension scheme or death in service trustees to make payment to a Bypass Trust rather than to your spouse or civil partner outright, you can be confident that the death benefits will remain accessible to your beneficiaries without forming part of their estates for inheritance tax purposes.
The Bypass Trust is discretionary, and the beneficiaries will include your surviving spouse/civil partner and children. These trusts are always subject to the trustees appointing the benefit to your spouse; your spouse has no right to demand the funds as the trustees have to consider ALL potential beneficiaries.
So during your spouse’s/civil partner’s lifetime he or she can potentially benefit from income and capital distributions (and possibly even from a loan of the Trust property which may be an allowable deduction for inheritance tax on the beneficiary’s death). The assets in the Trust will not, however, form part of your spouse’s/civil partner’s estate and will not therefore be taxed on his or her death. The Trust may simply continue for the benefit of the next generation (it should, of course be stressed that the Trust is flexible so that if your spouse/civil partner has need of all the Trust Fund it can be distributed to him or her provided that the trustees are in agreement).