Ill health transfers

With the recent news that we’re not living longer after all, there are questions to be asked as to why this is. Life expectancy increases the older you get, as the fact that you made it that far increases your chances of living to a riper age - a child born today can expect to live to 83/79 whereas a 65-year-old can expect to live to 86/83. The biggest increases in life expectancies arose in the first half of the last century due to improvements in immunisation programmes and significant reductions in infant mortalities. Nowadays the challenge for continuous improvement is more likely to be met by advances in treatment for heart disease, cancers and the like in middle age.

For those who do suffer ill health at a relatively young age, accessing their pension may be an option if certain requirements are met. Hopefully your clients are all fit and well, but if you do find yourself talking to someone who finds themselves too ill to work, then providing there is medical evidence that their condition renders them incapable (on a continuing basis) of carrying out their occupation then taking benefits before age 55 is an option. Some scheme rules may be more stringent and have a requirement that they must be incapable of carrying out any occupation - as an example someone who couldn’t do a physical job due to illness or injury but could still do a desk job wouldn’t qualify under some schemes.

Things can get a little more complicated when it comes to transfers. Take the example of Mr Jackson who has a condition at the age of 50 that prevents him from continuing in his current job, so he is forced to stop work. He has some investments which he lives off until the age of 52. During this period he decides to consolidate his various pensions into a SIPP to make them easier to manage. He then wants to take some funds from his pension.

At the point he joined the SIPP he’d already stopped working and the legislation states that to access pension benefits before age 55 the ill health condition must be met i.e. he must be (and continue to be) incapable of carrying out his occupation. The problem is, under the new scheme he doesn’t have an occupation, so you would be forgiven for thinking that he couldn’t access his benefits before age 55. However, following correspondence with HMRC we have had confirmation that in this scenario it is acceptable to look back at the member’s previous occupation.

Another scenario is that Mr Jackson ceased his original occupation and accessed benefits under his original pension scheme. After a few months he started a less strenuous job working part time which is manageable with his condition. His pension does not have to stop (unless the scheme rules state he cannot carry out any occupation), but if he then wants to transfer his pension at the point he joins a new scheme his occupation is the new part time job. When he wants to take his first benefit payment under the new scheme he would therefore not meet the ill health condition and would be required to wait until his 55th birthday to take further benefits.

There is also the issue of IHT with transfers in ill health. If the member has made a transfer in the two years prior to their death, and they were in ill health at the date of the transfer then this can be classed as a lifetime transfer and IHT may apply. The definition of ‘ill health’ in the context is less clear than when accessing benefits; it is IHTA 1984 that is relevant, not the pension rules.

There is an exemption under s10 IHTA 1984 (as used in the Staveley case) whereby if it can be shown that the disposition was not intended to confer any gratuitous benefit on any person then it will not be a transfer of value – and therefore no IHT will apply. In layman’s terms if you can show that the transfer is for the member’s benefit in their lifetime then you should be able to use this exemption. However if the reason for transfer is primarily to access better death benefits then IHT is likely to apply if death occurs within two years of the transfer.

Senior Technical Consultant

Lisa is an Economics graduate who has been in the financial services industry since 2003. Prior to joining AJ Bell in 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. Lisa is part of our Technical Team, responsible for providing regulatory and technical analysis to the business and outside world. She is also a regular speaker at adviser events.