Drewberry™ provide pensions, investment and insurance advice for Money to the Masses readers throughout the UK.

can i claim a disability pension and retire early?

Ill Health Pensions and Early Retirement

Unfortunately, sometimes there is a need to retire early due to ill health. However, disability benefits for working aged people really don’t add up to much with Employment and Support Allowance worth an absolute maximum of £109.65 per week.

What’s more, a 50-year-old today still has a further 17 years before state pension age.

Under normal circumstances it is not possible to release your defined contribution pension until you’re 55 and for final salary or defined benefit pensions they usually have an even higher retirement age – often 60 or even 65.

So can you retire early because of poor health? It’s possible under certain circumstances – this guide explains how to claim your pension early if you need to finish work due to a disability.

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How do you qualify for an ill health pension?

How do you qualify for an ill health pension?

To retire early due to disability, your physical or mental health has to be sufficiently bad to stop you from working, or at the very least seriously inhibit the amount you can earn.

Under normal circumstances you cannot access your pension before the age of 55 (unless you have the protected right to do so for a scheme you joined before April 6, 2006, something that can be checked with your pension provider). This means to access you pension before age 55 the medical grounds for early retirement tend to have to be severe.

How does poor health retirement work?

A registered medical practitioner must provide written evidence that you’re so incapacitated through disability, injury, sickness or disease etc. that you can no longer work.

This can sometimes be just your GP, but more often than not your pension provider will bring in an independent medical practitioner to assess your ill health to see if you qualify for early retirement.

 

Beware of unlocking your pension before 55

Some companies falsely claim to be able to unlock your pension before you’re 55. However, if you’re not in poor health the payment is likely to be considered unauthorised and attract a tax charge of up to 55%.

 

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What are the rules for claiming a pension early due to ill health?

There are two sets of regulations you’ll have to satisfy if a disability stops you working and you need early access to your pension. The first set is HMRC’s rules for claiming pensions early due to poor health, which state:

  • you must be incapable of doing your job through sufficient physical or mental impairment
  • you’ve had to stop working your job due to that disability
  • you won’t be capable of returning to your job in the future.

Evidence for this must be provided by a registered medical practitioner, as defined by Medical Act 1983.

What are the rules for retiring early because of disability?

The second set of rules for early retirement due to ill health are set by your pension provider. These will depend on who your pension is invested with and whether you have a defined contribution or defined benefit pension.

For instance, some pension plans let you retire early due to illness if you’re incapable of doing your job. However, other pension plans require you to be incapable of doing any job, even in a lesser role than your current one before you get access to your pension.

While the opinion of your GP is important, your pension provider will likely want evidence from their own independent medical practitioner.

This independent medical practitioner doesn’t actually have to meet you in person – sometimes their judgement can just be based on reading your medical notes. Ultimately it will be your pension provider who decides whether your health is bad enough to justify early retirement.

Casey Goodwin, Wealth Administrator at Drewberry, supports our expert wealth and pensions advisers

Remember, your GP signing you off sick is no guarantee that you’ll be able to take your pension early. You’ll have to satisfy both HMRC’s rules for ill health retirement and meet your scheme’s requirements.

Your pension provider or HMRC can reject your request for early retirement. While you can appeal, if you don’t meet their terms and you try to access your pension early in the meantime, you could face a huge tax bill on any cash you withdraw.

Casey Goodwin
Pensions & Investment Support Specialist at Drewberry

 

What are the pension tax rules and retiring early due to ill health?

Broadly speaking, the tax situation you find yourself in if you’re pensioned off early should be the same as if you’d reached your normal retirement age.

This is why there’s involvement from HMRC as well as your pension provider and you have to satisfy both of these parties that you need your pension early because of a disability.

Agreement from HMRC allows your tax position to be the same as someone who accessed their pension and/or retired at their normal retirement age.

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Personal pensions and ill health retirement

If you have a defined contribution pension – also known as money purchase pensions or personal pensions – you can access your pension pot from the age of 55.

However, if you have to retire before the age of 55 due to ill health your pension provider may let you unlock your pension early.

How do I claim my defined contribution pension early because of bad health?

  • Check your pension provider’s rules – every pension scheme has different rules about early retirement due to ill health, usually known as qualifying conditions.

  • Obtain and submit medical evidence from a registered medical practitioner to support your need to retire early.

  • Be aware that you will likely have to be assessed by a medical practitioner of your pension provider’s choice as well. It’s their opinion which will ultimately decide whether you qualify for ill health retirement.

Assuming your ill health retirement request is successful, you’ll then have access to your defined contribution pension pot to provide you with a retirement income. You can opt for pension drawdown or buy an annuity.

Get expert ill health pension advice from Peter Banks, Wealth & Pensions Expert at Drewberry

Although annuity rates have been poor in recent years, it’s likely to be well worth looking into an enhanced annuity if you’ve retired before the age of 55 due to ill health. These will pay a higher pension to those with certain life-limiting health conditions.

Peter Banks
Wealth & Pensions Expert at Drewberry

How are money purchase pensions taxed when you retire before 55?

If you have a defined contribution or money purchase pension, you’ll still be able to receive an initial lump sum of up to 25% tax-free as if you’d retired on or after your 55th birthday. The remainder can be used to provide yourself with an income, either in the form of income drawdown or an annuity.

Both pension drawdown and an annuity will be taxed as if you’d accessed your pension post-55.

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Final salary pensions and ill health retirement

The rules for retiring early if you have a final salary pension are generally tougher than if you have a defined contribution pension. This is because these schemes tend to be more rigid, with stricter rules surrounding when you can take your pension and the amount you’ll receive when you do.

How much will my final salary pension be worth if I retire early?

Final salary pensions are calculated based on three factors: the number of years you’e been in the scheme, a definition of your earnings whilst you were a member of the scheme and the scheme’s accrual rate.

how can i claim my final salary pension early due to poor health?

While the scheme’s accrual rate won’t change if you retire early, you’ll have fewer years in the scheme and your pensionable earnings at the date of your retirement will be lower, so your final salary pension might be lower too.

However, not every final salary scheme will reduce your pension based on fewer years of contributions if you need to retire early due to ill health.

How are final salary pensions taxed when you’re pensioned off early?

Final salary schemes represent a promise from your company to pay you an income for life. This income will be taxed in the normal way if you retire early due to poor health, just as if you’d reached the scheme’s normal retirement age. You may get an enhanced pension from your final salary scheme if you’re in ill health to accommodate for the fact that you’ll likely be drawing on it for fewer years.

 

I’m in poor health – should I transfer out of my final salary pension?

If you have a final salary pension and you’re thinking of requesting to be pensioned off due to poor health, it may be worth considering a final salary pension transfer. This involves taking a cash lump sum invested in a defined contribution pension in exchange for giving up the right to an income for life. You can request a cash equivalent transfer value from your final salary scheme, which may take into account your ill health when providing you with a transfer value.

should I leave my DB pension if I'm ill?

Having this pot of cash to pass down to your loved ones has a number of benefits compared with having your pension in a defined benefit scheme, where there’s no cash to inherit.

There’s no inheritance tax to pay when you leave a pension pot to your beneficiaries (providing it remains invested in a pension or in drawdown). Your beneficiaries also won’t have to pay income tax if you pass away before the age of 75.

For those who are so ill that they’re unlikely to be claiming their final salary pension for many years, a transfer could mean you get far better value for money from your final salary scheme. However, the rules for being pensioned off early will depend on your final salary scheme.

Drewberry’s Final Salary Pension Calculator takes your health into account when working out how much your final salary pension could be worth if you decided to leave.

Neil Adams
Pensions & Investments Expert at Drewberry

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do you get the state pension early if you're ill?

Can I claim the state pension early due to bad health?

No, you can’t get the state pension any earlier than your state pension age regardless of the state of your health. This is why it’s so important to have an alternative arrangement to the state pension, one that you will be able to access early should your health stop you working.

Will I still get the full state pension if I have retired early?

It’s possible you won’t be entitled to the  full state pension if you retire early due to ill health. Men born on or after April 6, 1951 and women born on or after April 6, 1953 will receive the new state pension, eligibility for which is based on your National Insurance (NI) record.

do you get the state pension early because of disability?

To qualify for the full new state pension, you’ll need 35 years of National Insurance contributions. If you’ve retired due to ill health before paying in those 35 years you could face a lower state pension than you thought.

This government calculator lets you check how much of the new state pension you’re entitled to.

What if I haven’t paid enough NI contributions to get the full state pension?

You may be eligible to receive National Insurance Credits because of your illness or disability between the age you retire due to ill health and your state pension age. You may also be able to ‘top up’ your National Insurance contributions with voluntary contributions if necessary. More on this can be found here.

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How do I qualify for a serious ill health pension?

To qualify for a serious ill health pension, you must have been diagnosed as terminally ill with a maximum life expectancy of 12 months. The rules for taking a serious ill health pension are very similar to a regular poor health pension, but the medical expert in question must instead diagnose you as having less than a year to live.

 

How do serious ill health pensions work?

With serious ill health pensions, because your health is severely compromised and you’ve unfortunately been diagnosed as terminally ill, the way you receive your pension and the way it’s taxed are slightly different.

Money purchase serious ill health pensions

If you have a defined contribution pension the normal tax rules – where you’re entitled to take up to 25% tax-free – don’t apply when you’re seriously ill. On being diagnosed with less than a year to live, you’re entitled to take the entire defined contribution pension pot as a one-off tax-free cash lump sum, providing:

The Finance Act 2016 relaxed the rules surrounding serious ill health pensions, abolishing a 45% charge on those over 75 taking their pension as one lump sum after being diagnosed as terminally ill.

Now a serious ill health lump sum for the over-75s is taxable as income instead. It also removed the need for a pot to be ‘uncrystallised’ (i.e. untouched) to be eligible for a serious ill health payout. Now, any uncrystallised portion of a pot may be paid out.

Wealth & Pensions Expert at Drewberry is qualified to offer you advice on serious ill health pensions

Remember, although it’s possible to take your pension as one lump sum after being diagnosed as seriously ill it’s not always advisable to do so. Once you remove the cash from the pension wrapper it becomes part of your estate for inheritance tax purposes.

Although taking your entire pension pot this way is tax-efficient for you at the time, it may be better for any beneficiaries if you bought an annuity or moved the pot into drawdown.

Peter Banks
Wealth & Pensions Expert at Drewberry

Serious ill health pensions and the lifetime allowance

If you’re under 75, a serious ill health pension is deemed a ‘benefit crystallisation event‘ or BCE. This is a milestone at which your pension pot is tested against the lifetime allowance to make sure it isn’t over the limit.

If you’re under 75 and apply for a serious ill health pension having exceeded your pension lifetime allowance – currently £1 million in the 2017/18 tax year (unless you’ve applied for lifetime allowance protection) – any amount over the lifetime allowance will be subject to a charge of 55%. The rest can still be taken tax-free.

If you’re over 75, a serious ill health pension is not a BCE because you’ll already have been tested against the lifetime allowance on your 75th birthday, as is the case for everyone.

Terminal ill health and final salary pensions

If you have a defined benefit pension, the rules surrounding whether you can be pensioned off early due to serious ill health vary considerably between schemes. The rules of your final salary scheme take precedence here, so the only way of knowing for sure what you’ll be offered on being diagnosed as terminally ill is to check with your provider.

Can i take my final salary pension early if I'm terminally ill?

Some will offer you an ‘accelerated payment’, paying you the first five years of final salary income you’d ordinarily have received as an upfront lump sum. Others may have no ability for you to take any additional benefits from the scheme to take into account your severely compromised life expectancy.

Again, a final salary pension transfer could be a better option here for getting access to your retirement cash if you’ve been diagnosed as terminally ill.

Once a final salary transfer has taken place and the cash equivalent value has been moved into a defined contribution pension, you can take the 100% tax-free sum from it once you provide medical proof that you’re terminally ill. Alternatively, you could move it to drawdown or another arrangement that will offer optimum tax efficiency for you and your loved ones in the future.

Don’t forget, final salary pensions often offer a widow’s or survivor’s pension for your spouse, and may even provide an income for dependent children after your death. You’ll be losing these if you leave your defined benefit scheme, so it’s important to weigh all the options and seek expert pensions advice.

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recovering from ill health after retiring early

What if my health improves after retiring early?

Should your condition improve after you’ve been pensioned off early due to bad health, HMRC’s tax rules allow for your pension to be reduced or even stopped at any time.

This is at the discretion of your pension provider. Some have rules surrounding improvements to your health if you’ve retired early due to disability, while others will not reassess you to ensure you’re still entitled to your ill health pension.

However, if provisions for reassessing your pension are included in the scheme’s rules, then your provider is entitled to adjust your ill health pension to a level it deems appropriate to your ability to work. For instance, if your health improves so that you can return to work part-time, your pension may be reduced to reflect your part-time earnings.

Should your health deteriorate again, it’s possible for your pension provider to recommence or increase your pension to the level it was at before it was stopped/reduced.

Expert advice on early retirement

Pension and ill health retirement advice

As you can see from the above guide, being pensioned off early due to ill health or disability can be quite complicated. There are a number of factors to consider, particularly if you’re a member of a final salary scheme. The taxation of poor health pensions is another issue that can be fraught with difficulties and that is why it is so important you can make an informed decision – not just yourself but also any beneficiaries.

If you’re ill, having a conversation with an adviser is probably the last thing on your mind. However, it’s so important to get financial advice if you’re leaving work early due to bad health – otherwise you risk potentially not doing the best thing for you and your family. A conversation with an adviser can bring huge peace of mind so you can focus on your health.

At Drewberry our experts offer full pensions advice over the phone, so you can sort out your retirement finances from the comfort of your living room. Feel free to pop us a call any time – we’re here to help on 02084327333.

Tom Conner
Director at Drewberry

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