Ill health – keeping the options open
One of my techie colleagues has recently done some analysis on the most common queries we have dealt with in the department in the last 18 months. Unsurprisingly, a large proportion related to taking benefits, but in particular we get a lot of queries regarding ill health benefits. The criteria for accessing funds before age 55 on health grounds are relatively well known: the member is, and will continue to be medically incapable of continuing their current occupation due to ill-health, and as a result of ill-health has ceased that occupation. So the queries we get tend to revolve around the evidence provided, but also the line between ill-health pension and serious ill-health lump sum.
The lump sum can only be taken when the member has had the bleak diagnosis of less than one year to live. Often when we are first approached by an adviser with a client in ill-health, this is not the case. More common is the scenario where the long-term prognosis isn’t great, but still more than 12 months. In the pension freedom age, whether you have an early ill health pension or serious ill health lump sum you can access your whole fund if desired. The big difference is that your ill health pension is taxed (after your PCLS is paid in the usual way), whereas the serious ill health lump sum is tax-free (up to the LTA, and under age 75).
Clearly each client’s financial circumstances will be different. For those that have other available assets, leaving the pension untouched and therefore outside the estate is the obvious choice. However, for those less financially fortunate it may be worth crystallising as little as required under the ill health rules if they are under 55 - or just normal rules for those who are older but taking benefits for the first time. So you could consider either taking UFPLS payments or maximum income under flexi-access drawdown. This would leave a larger proportion of their fund uncrystallised so that if they do get the unwanted news these funds could still qualify under the serious ill health lump sum rules, and so be paid out tax-free in their final year.
Even those with reasonable financial provisions may suddenly have substantially higher income requirements at this time. This could be for private care to make their final days more comfortable, to help them complete their bucket list, or even to pay for pioneering private treatment not otherwise available that may potentially extend their life. Having funds available tax-free may be a big help.
These will be tough times for your clients and their families, but getting the advice right and keeping their options open as their circumstances change can help make things a little easier.