Households are rushing to buy life insurance ahead of the April 2027 pension inheritance tax (IHT) changes introduced under Prime Minister Andy Burnham and Chancellor John Healey, according to a warning from Royal London. The insurer reports that more customers are seeking life insurance specifically to offset potential inheritance tax liabilities, as new pension sales have increased by five per cent to £4.7bn.
What the Pension IHT Changes Mean
From April 2027, pensions will be included in the scope of inheritance tax, meaning unused pension funds and death benefits will count towards the value of a person's estate for tax purposes. This change, set to be implemented by the Burnham-Healey government, has triggered a wave of financial planning among families concerned about their tax exposure.
Royal London's chief executive Barry O'Dwyer highlighted the impact on business owners: "It doesn't take that much, if you're a small-business owner and you have a pension pot built up, to be tipped over the thresholds." He warned that the worst-case scenario for many families is having to sell their business to pay the inheritance tax bill.
Advisers Recommend Life Insurance
O'Dwyer noted that financial advisers are increasingly recommending life insurance as a strategy to cover potential tax bills. "A lot of advisers will recommend taking out life insurance to effectively pay your tax bill," he said. This trend is expected to continue as the April 2027 deadline approaches.
The surge in life insurance sales is part of a broader pattern of customers seeking certainty in uncertain times. O'Dwyer explained that there is "a little bit of nervousness about overheated markets and so some customers want to keep some money in short-term deposits." He added that this reflects "a little bit of customer nervousness, but also a little bit of savvy behaviour by customers trying to figure out how they can generate the best return on their money."
Industry Calls for Clarity Ahead of Budget
Royal London has joined other major financial firms, including Standard Life, Hargreaves Lansdown, and AJ Bell, in calling on Chancellor Healey to publicly rule out changes to tax-free cash entitlements ahead of his October 28 Budget address. O'Dwyer stressed the need for certainty: "What we would love is some certainty in the run-up to the Budget so that people don't make decisions that they subsequently regret."
The industry warns that continued speculation over potential changes risks creating a "damaging cycle of uncertainty" that could lead to hasty financial decisions. As the April 2027 implementation date draws nearer, the pressure on the government to provide clear guidance is mounting.
For families and business owners, the message is clear: understanding the new pension IHT rules and planning ahead with tools like life insurance could be crucial to protecting their assets and avoiding forced sales of businesses to cover tax bills.
