How clients can take pension benefits early due to ill health

  • Identify when and how clients can take their pension benefits early due to ill health
  • Outline the conditions needed to pay out a serious ill-health lump sum
  • Describe how the benefits are taxed
How clients can take pension benefits early due to ill health

Normally people have to wait until the age of 55 before they can access their pension benefits.

There are a few notable exceptions to this rule, and one of these is taking benefits early due to ill health.

There are two sets of circumstances for taking benefits early through ill health.

The first is early retirement where the individual cannot carry on working (usually) in their occupation, while the second is taking all benefits early due to serious ill health where they are not expected to live for more than a year.

This article covers both of these.

The rules surrounding ill health benefits aren’t particularly complicated.

How the rules are interpreted and applied often depends upon the pension scheme’s rules, however, so it’s worth checking with the scheme administrator how ill health requests are treated in that particular scheme.

Scheme administrators have to include details of all ill-health cases on their quarterly tax returns to HMRC.

Because of this high visibility they are naturally keen to make sure all the ‘Is’ are dotted and the ‘Ts’ crossed, in case HMRC decide to challenge them on case details.

Early retirement through ill-health

An individual can take their pension benefits before the age of 55 if, due to ill health, they are unable to carry out their current occupation. 

However, it’s worth noting that some schemes’ rules are stricter and will require the individual to be incapable of carrying out any occupation, not just their current one.

A lot can hinge on the word ‘occupation’.

For example, take someone who has founded a company, is a major shareholder, and then becomes ill and is unable to return to their job of managing director full-time.

Instead, they return as a non-executive director working fewer hours.

HMRC might argue they are performing effectively the same job as before (just for a shorter time period) and still in the same occupation. 

Scheme administrators may want proof the individual has left their previous occupation, such as a copy of the P45 form.

However, if the individual is carrying on working for the same company in some other capacity, then the scheme administrator may want robust evidence to back this position.

If someone transfers to a new provider while taking benefits early through ill health and has already stopped working, then the new scheme administrator may want to know what the individual’s previous occupation was and what work, if any, they are doing now. 

Medical and other evidence

When granting requests to take benefits early due to ill health, scheme administrators need to have written evidence from a registered medical practitioner that the client is unable to return to their current employment. 

Different providers and scheme administrators will have different requirements and forms to complete, so it’s best to check what the scheme may want or need beforehand.