Pension Ill-Health Benefits

8 months ago

A client with a life-changing illness will already have many obstacles to overcome, says Martin Jones, Technical Manager at AJ Bell. When it comes to accessing a personal pension before 55, their adviser can play a crucial role.

If a client becomes ill and has to give up work earlier than planned, they may need to fall back on their savings and investments.

ISAs, investment accounts and cash deposits will be relatively straightforward to deal with and may be enough to tide the client over. If they want to take a large lump sum or set up a regular income, they might turn to their pension. These, however, come with more complicated rules.

In this article, I’ll recap those rules and set out a few useful points to remember.

Ill-health condition

With the exception of members who have a protected pension age, the earliest members can access their pension without incurring unauthorised payment charges is 55.

However, members in ill health can take benefits earlier if they meet the ill-health condition. There are three parts to this.

  • The member is presently incapable – due to injury, sickness or disease – of performing their occupation.
  • The member must continue to be incapable of performing their occupation on an ongoing basis into the future.
  • The member must have ceased to carry out their occupation.

The first two points are a question of opinion and must be confirmed in evidence submitted by a qualified medical practitioner to the scheme administrator. While most scheme administrators don’t typically have the expertise to query medical advice, it’s possible that the scheme administrator may still make further enquiries.

The third point is more a question of fact than opinion. However, different scheme administrators may approach this in different ways.


As you can see, the term ‘occupation’ features heavily, and it’s useful to explore this a bit further.

The first point to note is that the reference here is to the member’s occupation and not to any occupation.

Therefore, if a client had an occupation when they joined the pension scheme that was primarily manual, which they then had to give that up due to illness, but were still able to perform an office-based occupation, it’s possible they would still meet the ill-health condition.

Perhaps a more common scenario, however, is where a client has already given up work and is looking to open a SIPP into which they can consolidate their pensions before drawing on them.

This can be more challenging to square off with the rules given the client didn’t have an occupation when they became a member of the scheme.

In this context, HMRC has confirmed that it expects scheme administrators to look at the occupation that is (or was) most relevant to the member. This will typically be the one they performed most recently. Expect scheme administrators to probe into this.

Another scenario where you might need to be careful is with clients who are performing a reduced role, perhaps on a part-time or ad hoc basis. If the role is similar in nature to what they were doing before, they might not satisfy the ill-health condition.

To give an example, we were recently contacted about a small self-administered scheme (SSAS) where one of the members was previously the managing director of the company attached to the SSAS. He was no longer able to work as the MD, but the company still valued his knowledge and expertise, and he was coming into the office a couple of days a week in a consultancy role. We urged caution on this case given the rules look at occupation and not workload.

While I’ve focused here on the legislation, it’s also important to note that the scheme rules of a particular scheme might be stricter. For example, they might set the bar higher in terms of incapacity and only allow payments when the member is incapable of carrying out any occupation. It’s important to check this with the scheme administrator before any pension planning takes place.

The provider

It’s also worth taking a moment to look at how ill-health cases are viewed from a provider’s perspective.

Scheme administrators are required to record all early-access ill-health cases on the annual report they file with HMRC. This means it would be an easy area for HMRC to audit.

Furthermore, if HMRC came across a case where it disagreed with the decision, it could lead to significant unauthorised payment tax charges for the client.

Given the high visibility and severity of outcome, it’s likely to be a high-risk area for providers, and they will want to make sure they’ve ticked all the right boxes.

While an adviser’s first responsibility is of course to their clients, their knowledge of the rules and their ability to see the situation from both sides can be crucial in terms of coordinating the process and manging expectations for a client in need of expert support.

This article was previously published by Professional Paraplanner

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Martin Jones

Martin Jones

Job Title
Technical Manager

After completing his postgraduate studies at Lancaster University, Martin spent two years working for a leading insurance company before joining AJ Bell in April 2007. Martin worked initially on the AJ Bell Investcentre product before moving to a technical role in 2009. His main focus is providing technical support to the various teams and departments within the business. He is also involved in delivering training to staff on the rules and regulations that affect our customers.

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