Can I access my pension or retire early due to ill health or terminal illness?

If you become ill and then unable to work, and it’s unlikely that you are able to return to work, you may be allowed to access your pension funds early and without any early retirement reductions.

You are allowed to access your pension early before the age of 55 and without any early retirement reductions being applied due to poor health, disability or terminal illness – and is also known as being ‘medically retired’.

There are a lot of considerations that you, your employer and your pension provider will have to take into account. If you’re considering ill-health retirement. Here you can find out if you meet the qualifying criteria to be medically retired, the process that you have to go through and if you’ll be eligible for any ill-health retirement benefits. 

What is the criteria for ill health retirement?

Different schemes have different rules, generally the member needs to prove they are permanently incapable of continuing their employment. And generally, the member wouldn’t be able to fulfill any other role within the company in any capacity. 

Employers are putting much greater emphasis on making adjustments to people’s roles to facilitate a return to employment, as opposed to allowing ill-health retirement.

The benefits you receive are dependent on the severity of your illness and the likelihood of you returning to work. In order to qualify for retirement on medical grounds and early access to your pension benefits, you must meet the following conditions:

• Retire from any pensionable employment due to physical or mental illness
  
• Due to the nature of your illness, you are permanently incapable of  carrying out your work duties (Tier 1)
• Due to the nature of your illness, be unable to engage in any form of regular employment (Tier 2)
• Be under the normal pension scheme age

If you need help with accessing your pension due to ill health or even just financial advice and planning, as financial advisors can help people across the UK.

Ill health and defined benefit pension schemes (final salary pension schemes)

Some employers will generally allow early pension payment without actuarial reduction on grounds of ill health. It’s important to get all the facts off your employer, however, as some schemes will reduce the pension you get, To reflect that benefits will be paid for longer.

Others won’t make this reduction, and may even increase your pension if, for example, your condition is terminal. It’s best to speak to your employer to get confirmation.

Ill health and defined contribution pension schemes

For Defined Contribtuion pension scheme members, ill health may make it possible for you to retire and withdraw your money, regardless of your age. The options on taking pension benefits early should follow what is normally allowed – for example, a tax-free lump sum combined with either drawdown, lifetime annuity or scheme pension (where allowable) or a small pots lump sum or uncrystallised funds pension lump sum (UFPLS) may be offered depending on the type of pension arrangement held and the size of the fund. The lifetime allowance is not reduced due to taking pension benefits early under ill-health 

Check the terms and conditions – they should set out the circumstances that unlock early pension access (usually as ‘qualifying conditions’).

For instance, a defined contribution pension provider may have some conditions, such as:

• You must not currently be in work due to either physical or mental impairment
• You must not be able, nor intend to return to work
• We must receive written confirmation from a fully registered medical practitioner that you are incapable of working now or in the future in any job due to either physical or mental impairment

Can I get ill health retirement due to mental health

If you are unable to work because of mental illness and are able to get medical certification. There’s a good chance you can retire on the grounds of ill health.

Do I need to take financial advice to access my pension for ill health

It’s always recommended that you seek independent pension advice when accessing your pension due to ill health, however, there is no legal obligation to do so.

What is the process for drawing my pension due to ill health?

The criteria and procedure for each scheme differ. Ask your provider exactly what they need from you. It’s a good idea to enlist the support of an independent financial adviser (IFA). They can guide you through the process, ensuring you know your rights and complete each step accurately.

Steps generally include:

1. Complete a copy of the ill health retirement application form from your pension scheme.
2. Get medical proof confirming your condition. This could be a letter or signature on the application form from your doctor. It could also require a more objective and independent professional assessment from medical advisers.
3. Get confirmation from your employer that ill health is the only reason for your retirement.

Once your application is submitted (either by you or someone on your behalf) your provider will either award the benefits, request more evidence, or reject your application. The scheme will need to provide detailed reasons for rejection, so that you can appeal if you don’t agree with their reasoning. If you appeal, ensure you do so within the allocated time frame and remember you may need to provide fresh medical evidence.

What sort of annuity payout can I expect with ill health retirement?

Where a member has a reduced life expectancy, they may be able to get a higher income if they purchase an impaired life annuity on a single life basis. Purchase of a joint-life annuity would be costed based on the income being paid until the second person died.

What benefits can I claim if I retire due to ill health?

The state pension is the pension paid to you following retirement, provided you have made enough national insurance payments throughout your life.

If you are retiring early, or are unable to continue to work as a consequence of early retirement through ill health or advised medical retirement, your state pension may be affected.

Normally, you can only claim your state pension once you reach state pension age. This may not be the case if you are retiring on medical grounds, and you may have access to early state pension due to ill health.

You may be able to access the full fund through a tax-free lump sum withdrawal. If you are married or in a civil partnership, up to half of the fund could be retained by your pension scheme.

Since this may be the case, it is definitely worth contacting your pension scheme provider. Your provider can check your eligibility and confirm whether your circumstances allow you to access the fund early.

Can my employer refuse ill health retirement?

An ill health retirement referral can be refused or stopped in certain circumstances, for instance, if you are under investigation for alleged misconduct that could lead to your dismissal. 

In most cases a decision on ill health retirement will be deferred by your employer until the investigation has been completed and then only progressed if you have not been dismissed for misconduct.

An ill health retirement application can also be rejected by your employer if you refuse or withdraw consent for the Scheme Providers Medical Adviser to carry out their duties.

What if I discover I am terminally ill when going through the process?

If you’ve already retired due to ill health, received payments and are then diagnosed terminally ill. You may still be entitled to an additional payout, but the money you’ve received will affect how much you’re entitled to. 

Can I access my pension due to terminal illness

You can access your pension due to terminal illness if you have less than 12 months left to live. You will have to contact the Scheme Medical Adviser who will advise you on the best way to proceed.

If I am terminally ill can I access my pension as a one-off lump sum

If you have a life expectancy of less than 12 months, you will be able to take serious ill-health retirement. You can typically get the whole of your pension as a one-off lump sum.

• If you are aged under 75 – the whole sum is usually tax-free. In this case, a registered medical professional must give evidence to the scheme administrator that your life expectancy is less than 12 months.
• If you are aged 75 or over – 25% of the lump sum is tax-free and the rest is taxed as income.
• If you have taken a lump sum – this could affect any means-tested benefits you are getting.
• If you choose to take serious ill-health retirement – you might use all of the money you have saved. This means there would be no benefits payable to your beneficiaries after you die. This depends on the rules of the scheme.
• If you are still in active service and die before taking your pension – before choosing to take serious ill-health retirement check the ‘death benefits’ payable to your beneficiaries if you were to die before taking your pension. For example, if you die while employed, your pension scheme may pay out a lump sum called death-in-service.
• If you were to die after taking your pension – any money you take from your pension, but do not spend or give away before you die, becomes part of your estate. Your estate is the money, possessions and property you leave behind. 

State pension and terminal illness

The Special Rules for Terminal Illness (SRTI) are special rules that apply if you’re living with a terminal illness. Under the rule, if you’re eligible, you won’t have to wait as long to receive your benefits as the claim can be fast tracked. You may also qualify for a higher rate of benefit without having to be assessed. 

Will I qualify for the special rules?

To meet the qualifying criteria you must meet the government’s definition of terminal illness, which is:

• If your death could be ‘reasonably expected’ within the next six months, you are considered terminally ill.
• If you haven’t been given an exact time frame on life-expectancy, you can ask your doctor or nurse to support your claim.

Which benefits do the special rules apply to?

The main benefits for people living with terminal illness are covered by the special rules, you may be eligible to claim 

• Employment and Support Allowance for people who are ill or disabled and can’t work or have limited capacity to work.
• Universal Credit for people who are on low income or out of work. It also supports people who are ill or disabled and can’t work. 

You may also be entitled to ‘Disability benefits’ 

• Personal Independence Payment for people aged 16 or over and under State Pension age.
• Disability Living Allowance for children aged under 16 in England, Wales and Northern Ireland who need help due to a disability or health condition.

Terminal illness pension rights

Your pension rights for terminal illness will vary depending on your pension providers policy. Every provider makes provision for terminal illness so it’s worth contacting them immediately to find out what their process and payouts are likely to be.

How do I apply for state benefits if I’m terminally ill?

Ask your doctor or nurse to fill in a DS1500 form. This confirms your diagnosis and may also entitle you to get benefits at a higher rate.

Personal Pension and Terminal Illness

If you need advice on your personal pension and terminal illness please don’t hesitate to get in touch either through our pensions and retirement advice page or by clicking the button below

About The Author

Joslin Rhodes

See author's posts