Ill health pension benefits explained

Accessing pension benefits is usually restricted until the normal minimum pension age, currently set at 55, and rising to 57 in 2028. However, early access may be possible on health grounds under two circumstances: ill health and serious ill health. Each has specific criteria, options for benefits, and distinct tax implications. As part of our Bitesize Technical series, Senior Technical Consultant, Joshua Croft explains ill health pension benefits.

Key insights on ill health pension benefits

Early access is allowed on health grounds, with two types: ill health and serious ill health.

Ill health retirement

Clients may be eligible to access their pensions at any age if they meet the ill health criteria. The basic requirement is that the scheme administrator receives medical evidence showing that the member is, and will remain, unable to continue their current occupation due to injury, illness, disease, or disability, and that they have stopped working in that role.

Some schemes may have stricter conditions, requiring incapacity from any occupation.

Pension benefits are taxed the same as at normal retirement age, with up to 25% available as a tax-free lump sum.

Serious ill health

The serious ill health condition is met when a client receives a clinical prognosis of less than twelve months to live. In such cases, the entire pension fund can be withdrawn as a lump sum, regardless of the client's age.

Two important points to remember about serious ill health lump sums are:

• they can only be paid from uncrystallised funds; and
• the entire fund under that arrangement must be fully withdrawn.

This means you cannot partially crystallise funds to take a serious ill health lump sum.

If the member is under age 75, the serious ill health lump sum is tax-free up to the Lump Sum Death Benefit Allowance, with any excess taxed as income.

More Bitesize Technical

Take a bite out of 'Small lump sums explained', the next instalment of our pension benefits Bitesize Technical series, or start from the beginning, here.