Retiring early due to ill-health allows you to access your pension benefits, but how you access it and what options are available for withdrawing it, will be dependent both on the scheme rules and the type of pension that you have. In this guide, we look at some of the essential points to take into consideration.
The headline facts at a glance
In normal circumstances in the UK, the earliest you can take your pension is from the age of 55 through pension release. However, you can access your pension at any age before this if you have to retire early from your occupation due to serious ill-health. To process your claim in all cases, you will need to get medical certification to state you can no longer continue in your job role – but scheme rules vary greatly. In order to withdraw your savings in a manner which is most appropriate to your needs it is important to understand what options for withdrawal your scheme offers. If your scheme does not offer the option you need, it may be worth considering transferring your savings to another scheme.
How do I access my pension?
How do scheme rules differ?
Retiring early through ill health is generally accepted, but you will need to read your scheme rules to find out exactly what they allow for. The provision is generally known as “ill-health pension” and can be claimed when you suffer from either mental or physical illness which prevents you from carrying out your job description. The text you will normally see in your scheme is: “your physical or mental health is bad enough to stop you from carrying on working, or which seriously reduces the amount you can earn”1
What if I am not allowed access to my pension?
You can challenge the decision made by the pension managers/trustees on the basis that the decision made maybe flawed. It does not necessarily mean the decision will be changed, but you can ensure the correct procedures were taken. The pension provider must be seen to have asked the right questions, kept correctly to the law in relation to scheme membership. The decision-makers must consider all and only relevant factors and come to a decision that any reasonable person would.
What contributions will be made to my pension?
It maybe that due to the change in your life circumstances you will be unable to carry on making the same contributions to your pension. In which case your pot will grow at a slower rate (money purchase pension) and provide lower retirement benefits when you decide to start drawing down. If you have a personal or stakeholder pension and took out Pension Contribution Insurance (PCI) this can help with payments.
If you have a work pension scheme and your employer is still paying you an income, then contributions will continue to be paid into your pension They will also deduct your contributions from your pay and pay them into the scheme. If however they stop paying your normal salary due to your ill health your contributions could reduce or stop
Hopefully the information in this guide has given you a clearer idea of the pension options available if you can no longer work due to ill-health. Below are three of our most frequently asked questions.
Are there special rules for terminal illness?
Yes. These rules would come into use if a person has less than 12 months to live. In such cases, it is possible to take the whole of the pension benefits in one tax-free lump sum if you are under 75 (and providing you have enough lifetime allowance remaining). If you are over 75, you would be taxed at marginal rate (providing you have some lifetime allowance left), but an alternative in this situation would be to consider withdrawing your savings using flexi-access drawdown. This means the first 25% would be taken tax-free and the remainder would be subject to your marginal tax rate.
What is an impaired life annuity?
If you have reduced life expectancy it may be possible to buy an impaired life annuity which offers a higher level of annual income than a standard annuity. But they are complex and it may be wise to get independent financial advice.
Can I access my state pension early due to ill-health?
No. You cannot receive the state pension before you reach the government retirement age. You may however be able to claim benefits such as disability benefits and carers allowance to help you and your family. It is important to remember if you stop working, your National insurance contributions (NI) will stop too. If you have a gap in NI contributions, you may not get the full state pension. They are usually paid automatically if you claim benefits or, conversely, you make voluntary contributions.