‘I'm paying thousands of pounds to protect my children from inheritance tax'
Hiatt first took out a policy eight years ago, but was forced to take another deal out shortly after the October Budget, Labour's first in 14 years.
'Our pensions are now a cash cow for the Chancellor,' he says.
He is one of thousands of families across Britain attempting to shield their hard-earned money and mitigate a large inheritance tax bill.
Financial advisers say life insurance policies designed to pay off tax bills were traditionally seen as a 'last resort or sticking plaster' due to expensive premiums.
However, Labour's premiership has 'triggered a renewed surge in interest', says David Little, of financial planner Evelyn Partners. Some policies are specifically designed to meet death duties that may be due on gifts under the 'seven-year rule' (see more, below), while others simply pay out a cash amount that can be used as the family sees fit.
So, should you follow suit and take evasive action now, parting with large sums of cash today to potentially avoid larger sums in the future?
How life insurance can reduce your bill
From April 2027, private pensions will become part of a person's estate and therefore be liable for inheritance tax. This will add substantially to the amount of inheritance tax HMRC collects.
Reeves also targeted family businesses and farmers. Inheritance tax will be charged on 50pc of the value of business or agricultural assets above £1m from April 2026.
Hiatt, who lives in rural Warwickshire, spent 46 years working in the water industry as a project manager and retired nearly three years ago.
The 67-year-old has one life insurance policy with Scottish Widows, costing £500 a year, and one with Vitality Life, costing £717.24 annually.
They are 'term' policies, meaning a lump sum is only paid to his beneficiaries if he dies before his 90th birthday, and each payout is fixed at £50,000. He wants to leave his estate to his two children, who are 24 and 30.
If a life insurance policy is written into a trust, it is counted as outside of a person's estate, and the lump sum can then be used to pay an inheritance tax bill. Sometimes this is done automatically, but in other cases, it is up to whoever takes out the policy to make sure it is written into trust. Millions of pounds a year are needlessly handed over to HMRC in extra inheritance tax because this simple decision has not been taken.
Premiums vary depending on your age and other factors, such as whether you smoke. As the chances of dying sooner are far greater, policies for over-65s are usually significantly more expensive than for younger customers.
The average inheritance tax bill paid by estates has increased from £199,000 to £243,000, according to LifeSearch, a broker. It said a 60-year-old non-smoker can expect to pay £431 a month for whole of life cover of £300,000. For an 80-year-old, this soars to £1,413 a month.
On the other end of the scale, a 30-year-old buying a whole life policy would currently pay around £9.39 a month, with a £10,000 payout. If a 30-year-old wants a policy that will pay out £100,000, it will cost £54.20 a month with Legal and General, at today's rates.
Sales of whole of life cover, also known as life assurance, have increased more than threefold since last autumn, says insurance broker Justin Harper.
Harper, of LifeSearch, says: 'We have seen a noticeable rise in the number of whole of life policies being taken out specifically to address inheritance tax planning, driven by both adviser recommendations and customer-initiated enquiries.
A fixed amount of cover or cover that rises with inflation are available, Harper explains. The latter might be chosen as the potential tax liability is likely to increase over time.
If you are younger and planning ahead, term insurance can be 'more cost-effective in the short term'.
However, Katie Ridland, of wealth manager St James's Place, advises clients to opt for whole of life policies because 'you can't plan the date of your death'.
Both policies mean your family does not have to wait for probate, the money is released quickly and allows them to pay inheritance tax without delay.
'The best day to take out life insurance was yesterday,' adds Ridland.
'It's the two inevitable things that people don't want to talk about – death and taxes – but we need to talk about protection from an early age.'
After the Budget left him 'gobsmacked', Hiatt also decided to give money away to his children.
Unlimited sums of money can be given away without being liable for inheritance tax if they are made out of income, are part of normal expenditure and leave the donor enough money to maintain a normal standard of living (see more on the valuable unlimited gifting rule here).
The donor must live for seven years after giving the money to avoid a tax bill if they are leaving behind more than the tax-free allowance.
'I've got a substantial amount in a defined contribution pension pot, and I have also benefited from a final salary benefit scheme as well, so I count myself very lucky,' Hiatt says, 'but the Budget certainly put the cat among the pigeons. I'm really disappointed.'
Families can also use an insurance policy to protect these gifts from inheritance tax. A gift inter vivos insurance can be used to shield a loved one from paying the levy on money or assets if you pass away within seven years of gifting.
Tony Müdd of St James's Place says this is growing in popularity and is a 'simple and effective solution' to covering unexpected tax liabilities.
'Better ways of saving inheritance tax'
However, life insurance policies are 'by no means a silver bullet', Evelyn Partners' Little says.
Mike Warburton, The Telegraph's tax expert, warns they are only 'appropriate in the right circumstances'.
He adds: 'I am not keen on whole life policies, which are expensive and do not reduce the overall tax burden. In my view, there are better ways of saving inheritance tax.'
Savers can put other assets into trusts to protect them from death duties, as well as giving money out of surplus income, as explained above.
Warburton says there is a risk that elderly people will enter into a commitment to make regular premiums and 'subsequently run into a problem if they have expensive care needs.'
Little says: 'Whole of life insurance plans were seen somewhat as a last resort, or a sticking plaster until financial planning evolved. This was mainly due to the cost of the premiums, which can be very expensive, especially if health concerns are present.
'However, the October Budget introduced pensions into the estate calculation from 2027, triggering a renewed surge in interest from clients in these policies. When written in trust, they can provide a tax-free lump sum for children or other beneficiaries outside of probate, enabling the inheritance tax liability to be cleared, leaving the other assets intact and ready to be inherited.
'That's said, they are by no means a silver bullet. It is important that the expected total premium payable is weighed against the sum assured and life expectancy of the client.'
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