Retiring early due to ill health — what are the rules?

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If you’re ill and your illness is so bad that you can’t continue to work, you may be able to retire early. If you’re planning on taking ill health retirement- what are the rules?

Ill health retirement- what are the rules?

Whether or not you can take ill health retirement will depend on the pension scheme rules. And if you’re terminally ill and have less than a year to live, you may be able to take your whole pension as a lump sum. There are two sets of rules that may affect whether or not you can take ill health retirement. Its official name is early retirement due to ill health — or ERDIH. The two sets of rules are:

1. HM Revenue and Customs rules.
2. The rules relating to your employer’s pension scheme.

HM Revenue and Customs rules

There are several conditions that you have to meet in order for HM Revenue and Customs to approve your ill health retirement. That’s assuming you want to retire on ill health grounds before you are 55.

SAVVY TIP: If you don’t meet their conditions you could face a large tax bill when you take your pension if you’re not yet 55.

The conditions are:

1. You must have left your job.
2. You must be incapable of doing your job due to physical or mental illness.
3. You must be assessed as continuing to be incapable of doing the job due to your ill health until your normal expected retirement age. This is something your pension scheme administrator must get a doctor to confirm.

Your own pension scheme rules

As well as having to satisfy HM Revenue and Customs’ rules about ill health retirement if you’re under 55, your pension will have its own rules. These will apply no matter what age you want to take early retirement.

These rules may state, among other things:

That you are unable to continue doing any job, not just your own job, due to your illness. Some pension schemes will let you retire on ill health grounds if you cannot do your own job while others will only let you retire if you cannot do any job in your workplace.

  • That there is enough evidence to show that you are unable to work and cannot return to work before you retire. Your pension scheme may ask for evidence from medical experts other than your own GP.

SAVVY TIP: Your employer may commission a report from their own expert. The employer doesn’t necessarily have to go with your GP’s evidence if there’s a difference of opinion. However, they have to take it into account.

How much pension will you receive?

The amount of ill health pension you’ll receive will depend on your pension scheme rules. You should be able to take a tax-free lump sum as if you’d retired at the normal age. The rest should be taken as a pension or as pension income. The amount you will get and how it’s paid will depend on the type of pension you’re in.

  • If you’re in a salary-related pension scheme (otherwise called a defined benefit or final salary scheme): the most you will get is the pension you would have received at your normal retirement date, but based on the salary you’re earning at the time you leave work.
  • If you’re in a defined contribution scheme (otherwise called a ‘money purchase’ pension): you will be able to convert your pension fund into an income for life or take money from it directly.

SAVVY TIP: Many people choose to take money directly from their pension at retirement if they have a defined contribution pension. But if you decide to convert it into an income for life by buying an annuity, make sure that you find out how much extra you may be able to receive if your health is taken into account. You can read more about this in my article called If you smoke, have high blood pressure or a serious illness, you may be able to get a higher pension income for life.

If you have less than a year to live

If you’re in what’s called ‘serious ill health’ and you are expected to live for less than a year, you can retire at any age and you may be able to take your entire pension as a cash lump sum.

According to the GOV.UK website, you can take up to 100% of your pension fund as a tax-free lump sum:

If you’re aged under 75
If you haven’t used up your lifetime allowance. The lifetime tax allowance is the amount you can save into your pension throughout your life and be able to benefit from tax relief. In the current tax year 2016-17 it is set at £1 million.

If you’re over 75 the whole lump sum will be taxed at a rate of 55%. If you’ve used up your lifetime allowance you’ll be taxed 55% on the excess above the allowance.

SAVVY TIP: The GOV.UK website warns that some pension schemes keep at least 50% of your pension pot to provide a pension for your husband, wife or civil partner.

When things go wrong
The Pensions Advisory Service, which is a free-to-use pensions information service set up by the government says that it gets quite a few calls from people who’ve been turned down for ill health retirement or who didn’t realise it was available.

It says that some common questions it receives are:

  • From people who’ve lost their jobs on ill health grounds and who’ve been told they don’t qualify for an ill health pension. Unfortunately, being too ill to work doesn’t necessarily mean you’ll qualify for an ill health pension.
  • From people whose GP has said they can’t work but who’ve been refused an ill health pension. While your GP’s opinion is relevant, it won’t necessarily automatically override another expert’s view.
  • From people whose pension scheme won’t explain why they won’t pay an ill health pension. You should be told why your pension scheme won’t pay you an ill health pension. If you aren’t, the Pensions Advisory Service can contact them on your behalf.

Where to start

You have to contact your pension scheme administrator if you want to take early ill health retirement. Depending on the illness or medical condition you have, it may be worth contacting the relevant charity as they are likely to have experience of helping people in a similar situation to yours.

SAVVY TIP: If you feel you’re getting the brush off from your pension scheme, contact the Pensions Advisory Service. They have a lot of experience of answering queries and helping people who want to retire on ill health grounds.

If you recover from ill health

If you recover from your ill health, be aware that your pension scheme may reduce the payments you receive or stop them altogether. However, it’s not the approach all schemes take and some may continue paying your pension at the same rate as before.

Related articles:

Pensions jargon explained – what pension terms mean

Buying a retirement flat – what to look for

VIDEO: What is a pension?

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