If you are no longer able to work due to ill health, you may be eligible to receive your pension benefits early. This is known as ill-health retirement, and although it may seem difficult to support yourself financially, we are here to help.
In this article, we will answer some important questions that you may have about ill health retirement, and the rules around being eligible for it.
The main themes in this guide will explain everything related to ill health retirement. In this article, we will cover:
If you are no longer able to work due to either physical or mental illness, you may be able to take early retirement due to ill health, and receive your pension benefits without actuarial reduction. Without actuarial reduction, you are able to receive your pension benefits without having to pay a lump sum fee.
This BBC article highlights the proportion of workers forced to retire early due to illness.
Receiving your pension early without actuarial reduction is known as a Tier 1 award. If you can no longer continue to work and take your pension benefits without actuarial reduction and with enhancement, you are eligible for a Tier 2 award.
A Tier 1 pension award is granted on the basis that you can no longer undertake regular employment. Tier 1 is an enhancement of 100% of the pension that you would have built up in the scheme between your date of leaving, and the normal pension age.
A Tier 2 pension award is in addition to Tier 1, and is also based on the fact you can no longer undertake regular employment. Your pension is enhanced by 25% that you would have built up between the date of leaving and normal retirement age.
If you are not expected to live longer than a year, for instance in the event of a terminal illness, you may apply to exchange all of your ill health pension benefits for a tax-free lump sum payment.
It is worth noting that the above only applies if you are under 75, and do not exceed the £1,055,000 lifetime allowance threshold in pension savings. If you are over 75, you are liable to pay income tax on the lump sum you will receive.
You should seek advice on the other options available to you before finishing work due to ill health, since you could negotiate a more beneficial deal.
This 3 minute video explains the process for those who may qualify for ill health retirement package:
Usually, you can access your pension pot benefits from the age of 55, although this depends on your pension scheme’s terms and conditions. However, you may be able to access this pot before turning 55 if you are retiring early due to ill health.
Your employer’s pension schemes and HMRC have their own sets of rules which can determine if and when you can seek early retirement through ill health.
The benefits you receive are dependent on the severity of your illness and the likelihood of you returning to work. In order to qualify for retirement on medical grounds and early access to your pension benefits, you must meet the following conditions:
If you are facing retirement on medical grounds, you may be entitled to receive an enhancement on your pension benefits. However, this pension enhancement may make those taking an ill health retirement liable to an Annual Allowance tax charge.
An annual allowance is the maximum amount of pension savings one individual can make in one year that may benefit from tax relief.
If your pension savings exceed the annual allowance threshold for that year, you are liable to pay tax on any savings over the threshold. Currently, the annual allowance limit is £40,000.
HMRC has published advice aimed at those who meet their ‘severe ill health’ retirement criteria. This guidance gives those who meet the criteria an exemption from the annual allowance tax charge.
To meet HMRC’s ill health criteria, you must suffer from ill physical or mental health to an extent that makes you unlikely to undertake any work duties up to the State pension age, which is currently 65 years old, rising to 66 by 2020.
You must be able to provide evidence that shows you are incapable of performing in any job, not just the current job you wish to retire from. You must also provide clear evidence of the medical condition that is affecting your ability to continue to work.
You can gain a full medical report from either your own GP or an objective medical practitioner. You must also provide evidence that shows you have tried to improve your condition through different treatments.
Beyond this, you must continue to provide evidence that shows you cannot return to work up until you reach the normal age of retirement. It is important you do this so you do not risk losing your ill health benefits.
The state pension is the pension paid to you following retirement, provided you have made enough national insurance payments throughout your life.
If you are retiring early, or are unable to continue to work as a consequence of early retirement through ill health or advised medical retirement, your state pension may be affected.
Normally, you can only claim your state pension once you reach state pension age. This may not be the case if you are retiring on medical grounds, and you may have access to early state pension due to ill health.
You may be able to access the full fund through a tax-free lump sum withdrawal. If you are married or in a civil partnership, up to half of the fund could be retained by your pension scheme.
Since this may be the case, it is definitely worth contacting your pension scheme provider. Your provider can check your eligibility and confirm whether your circumstances allow you to access the fund early.
You must follow the rules described by your employer’s pension scheme when you seek to take ill-health retirement. These rules can vary between pensions providers, so it is essential to check the rules related to your own situation.
To do this, you can contact your employer’s Human Resource department. If you require more assistance in understanding the rules surrounding ill health retirement, you can get free advice from a financial advisor.
You should then contact your pension scheme provider and negotiate the terms of your ill health retirement pension, including any potential settlement agreements.
The Pensions Advisory Service can provide more detailed information if you wish to pursue this further.
Alternatively, you can take a pension transfer to an alternative provider and take a pension from there.
Any pension payments you are eligible to receive are dependent on your pension provider and the actual scheme you are registered to by your employer. Upon taking medical retirement, an initial tax-free lump sum will be paid as if you have retired at the normal retirement age.
Your pension scheme will be either:
Your employer may ask you to agree to and sign a settlement document. A settlement document, also known as a compromise agreement, is an agreement that both you and your employer agree to upon the end of your employment.
The agreement will settle any claims against your employer, and you will receive a financial payment detailed in the agreement. This article by Monaco Solicitors provides more detail about settlement agreements.
The money you are entitled to receive is also dependent on your circumstance. If you are a smoker and have a smoking-related disease, or any other lifestyle disease for that matter, you may receive fewer benefits.
Your employer is legally obliged to provide reasonable adjustments to your working environment if you are disabled or suffer from conditions including Multiple Sclerosis (MS) or depression.
If you believe you could continue to work then it is within your legal rights to ask your employer to make changes to your role, working hours or the workplace.
If you are concerned about managing your finances upon taking early retirement due to ill health, these 3 steps can help:
This excellent guide provided by the Money Advice Service can provide advice on higher retirement pension incomes for those with ill health.
Upon retirement, it is advised that you claim absolutely everything you may be entitled to receive. This is particularly important if you are suffering from a disability or long-term health condition that may have associated costs.
It is also important that you research the support available to you if you have either lost earnings or aren’t due to receive enough pension income. An example of this is the Employment and Support Allowance.
You can apply for the Employment and Support Allowance if you have been affected by a disability or health condition that has had a negative impact on your ability to work. The allowance can provide financial support to help with any living costs while providing support to returning to employment, should you be able to do so.
For more information, GOV.UK has a useful overview of the Employment and Support Allowance, your eligibility and what you’ll receive should you meet the criteria.
You should also claim help with essential finances, such as housing, disability and sickness benefits, since you may be entitled to important financial support. This financial support can be useful when managing your finances in the event of ill health retirement.
We recommend using a financial adviser, since they can give expert advice suited to your circumstances. They can also help with setting a budget and planning your retirement income.
Budget planning can be a useful tool to provide information on how much you need to save each month, and where necessary, the cutbacks that could help you save money in the future.
Most importantly, you are not alone in taking an early-retirement. There are many support networks available to you that can help with your situation.
This Guardian article, titled ‘How to have a long and health retirement’, provides some useful tips to help you plan finishing work early due to ill health.