Accessing DC pensions early through ill health – key points to consider
Pension scheme members normally have to wait until the age of 55 before they can access their pensions, but there are exceptions – perhaps the most notable being early access under the ill-health rule.
On the face of it, the ill-health rule can seem relatively straightforward. Applying it in practice, however, can be complex.
In addition, pension scheme administrators have to include all ill-health cases on their quarterly reports to HMRC. This means there is a higher level of visibility and therefore a greater risk of being challenged further down the line.
With that in mind, here are some key points to consider in advance of starting the ill-health benefits process with a client.
Occupation, occupation, occupation
To recap the rule, the member must:
A lot plainly hinges on the meaning of ‘occupation’. So how might this work in practice?
If a client’s occupation was head teacher when they joined the pension scheme, for example, and several years later they suffered a mental or physical illness that meant they could no longer work in any occupation let alone as a teacher, it’s unlikely that HMRC would challenge early access to the pension.
However, there are situations where it may be less clear.
A case put to us recently involved a client who was a director of a small-to-medium-sized enterprise. They founded the company and they were a major shareholder.
They were no longer capable of playing an active role due to illness, but they were unwilling to sever ties with the company completely. It was suggested they stop being a director and instead become a non-executive director with greatly reduced hours.
Given that the client would still have been at the same company and still performing a similar function, albeit in a reduced capacity, there was a risk that HMRC could probe further. And a client in this situation might find it harder to defend their position without robust evidence around the change in role.
Another scenario that may require further thought is where the client was not formally employed in an occupation when they joined the scheme. (It may even be that they’re already in ill health when they transfer.)
Where the client has no occupation, HMRC’s expectation is that scheme administrators look at the occupation that is most appropriate to them. The pension scheme administrator may therefore ask you further questions about the client in order to build up a picture of their work history before they can get comfortable enough to release funds.
Different schemes, different rules
It’s also important to note that some pension schemes may have stricter rules when it comes to ill health.
The HMRC guidance refers to “current occupation”, and the legislation simply says “occupation”. However, some schemes may only allow early access if the member is incapable of any occupation.
For example, if a client had an occupation that relied on their physical skill or capability, which they then lost due to an accident, but they could still perform a desk-based role in a different business or industry, some schemes may be comfortable allowing early access, others less so.
To evidence ill health, the legislation also requires that written evidence from a registered medical practitioner be provided. Different providers may have different views on what is acceptable and how strictly the wording must adhere to the legislation.
They may also have different standard forms to complete. Some of these may be more detailed than others.
All of these points are best to check at the outset in order to present a complete picture to the client about what will be required.
Prospects of recovery
A client may also want to know what happens if they recover and go back to work.
Outside of reducing a defined benefit scheme pension, the HMRC guidance doesn’t discuss recovery scenarios. And, strictly speaking, there is no requirement on the scheme administrator to assess ill health on an ongoing basis.
Therefore, if a client did recover and resume their previous role, it shouldn’t technically invalidate the earlier benefits. However, it’s something HMRC could conceivably probe retrospectively as to whether the client genuinely met the ill-health condition in the first place.
And, again, the scheme rules may be important here if they contain specific provisions requiring any income payments to stop on recovery. A client could find they have to wait until they reach age 55 to recommence benefits.
Ill-health cases are few and far between, but they are important to get right.
As ever, a bit of careful navigation can go a long way to creating a smoother journey at a time when your client needs it the most.