Ill Health and Serious Ill Health Early Retirement
Published / Last Updated on 15/05/2024
Many will be aware that the earliest you can access your pensions and retirement benefits in the UK is at age 55 (age 57 from 2028). Unless you have a protected retirement age from when early retirement age moved from age 50 to age 55 or if you are in specialist occupation that allows earlier retirement. If you access pension funds before these ages, HMRC deem it as an unauthorised payment and both you, your pension scheme and the pension scheme administrators may face heavy penalties.
What if I am Unable to Work Due to Ill Health?
HMRC does permit early access to pension funds if you are unable to work due to ill health. HMRC suggests ‘ill-health’ means you are unlikely to be able to undertake ‘gainful’ i.e., paid work in any capacity before you reach state pension age. This must also be confirmed by your employer (if you are employed), your doctor or consultant and verified by your pension provider. If all criteria are met, you may be able to access pension funds before age 55.
Serious Ill-Health Early Retirement
If you are diagnosed with serious ill-health i.e., your life expectancy is less than one year:
- Under age 75, you are permitted by HMRC to draw your whole pension fund as a lump sum, tax free whilst still alive.
- Over age 75, you are permitted by HMRC to draw your whole pension fund as a lump sum, 25% of the fund is tax free and the 75% balance is taxable in the normal way.
- Some pension providers may hold 50% of your pension fund back for any spouse or civil partner.
Normal Ill-Health Early Retirement
Early access to company and personal pensions is dictated by the pension schemes rules of each pension scheme. Some pension providers may offer an ‘unable to perform own occupation’ others may offer ‘unable to work in any occupation’ definitions. Again, your employer, your doctor or consultant and your pension provider must verify this.
- 25% of your pension fund is tax free and the 75% balance is taxable in the normal way.
- Some pension providers may hold 50% of your pension fund back for any spouse or civil partner.
Remember, whether you are granted ill-health early retirement will still depend upon the contract wording and pension scheme rules for your pension scheme.
Warning on Defined Benefit Schemes and Other Pension Transfers Within 2 Years of Death
- If you have a defined benefit final salary scheme or career average salary scheme, the scheme rules will usually allow for you to draw your pension early (with or without penalty depending upon the scheme) and then have e.g., a 50% spouses pension should you die.
- What if you don’t have a legally married spouse or civil partner or financial dependent children? If you die prematurely, your pension income stops and is gone becoming a windfall for the pension scheme.
- If you have a defined contribution (investment fund linked) company or personal pension, it may be that your pension scheme does not offer flexible access drawdown and your only retirement and early retirement option with them it to take your 25% lump sum and an annuity. Again, if you have no legal dependents or there is no spouses benefit built in, the pension fund is lost on premature death.
- Given the above examples, many people then look to transfer their pension scheme to a flexible drawdown scheme meaning that on death, their loved ones then inherit the pension fund on death (tax free below age 75 subject to the tax-free Lump Sum Death Benefit Allowance £1,073,100 and taxable over age 75).
- HMRC warns that if you transfer your pension to another scheme e.g., to access drawdown and die with 2 years, it may be ruled as a gift for inheritance tax purposes and the value may be included in your estate. There is even a question on HMRC ‘IHT 409 Pensions’ submission forms for estates (when you die): “Did the deceased, within the 2 years before they died, transfer or dispose of any benefits payable under a pension scheme or personal pension policy?”
If you are ill or seriously ill, you should take professional financial advice before accessing ill-health retirement benefits.
