Ill-health and serious ill-health

Definitions

What is the ‘ill-health condition’?

In pension terms, a person is considered to be in ill-health if he or she:

• Is, and will continue to be, medically incapable of continuing his or her occupation (as confirmed by a registered medical practitioner)
• Has stopped working in his or her occupation.

What is ‘serious ill-health?’

In pension terms, a person is considered to be in serious ill-health if a registered medical practitioner has confirmed that he or she is expected to live for less than one year.

What is ‘normal minimum pension age’?

Normal minimum pension age is the age at which most people can choose to start accessing their pension benefits. Normal minimum pension age is currently 55 and is due to rise to 57 in 2028. There are normally heavy tax penalties for people who access their pensions earlier, unless they are not subject to the normal minimum pension age – for example, due to their health.

What are uncrystallised funds?

Uncrystallised is the term used to describe pension funds which have not yet been accessed. They won’t have been tested against the lifetime allowance (please read our separate fact sheet for further information) and a pension commencement lump sum (PCLS, or tax-free cash) won’t yet have been taken.

What are unused funds?

If you reach age 75 with pension funds you haven’t access, strictly speaking those funds will thereafter be unused funds, rather than uncrystallised funds. The distinction is normally only important from a technical perspective: you’ll quite often see unused funds referred to as uncrystallised funds for simplicity.

Rules

What happens if someone meets the ill-health condition?

A person who meets the ill-health condition can access their pension benefits before normal minimum pension age (currently 55) without incurring the normal tax penalties for doing so.

Are there any tax implications of accessing a pension early due to ill-health?

Pensions accessed early due to ill-health are treated in the same way as those accessed from normal minimum pension age. For example:

• Individuals will still be entitled to a pension commencement lump sum (PCLS, also known as tax-free cash)
• The funds accessed will still be tested against the individual’s lifetime allowance
• Income payments will still be subject to income tax.

I meet the ill-health condition, but my provider still says I can’t access my pension early. Why might that be?

The rules of some pension schemes have stricter criteria when it comes to retiring early due to ill-health. Most common is a requirement for individuals to be medically incapable of undertaking any occupation, rather than just their own. This is more common in schemes which offer pension benefits which are difficult to ‘switch off’ once they’ve been started.

For example, with a drawdown pension, where income payments are taken directly from the person’s savings and can be changed as needed, it would be very simple to stop the payments if the person began a new job. On the other hand, with an annuity, where the pension savings are used to purchase an income which is normally payable for life, it would be problematic if the income was no longer required.

What happens if someone is considered to be in serious ill-health?

When a person is in serious ill-health, they are entitled to a particular form of benefit called a serious ill-health lump sum.

Are there any other conditions for a serious ill-health lump sum?

A serious ill-health lump sum can only be taken from uncrystallised (or unused) funds. If a pension contains both crystallised and uncrystallised/unused funds, a serious ill-health lump sum can be taken from the uncrystallised/unused element.

A serious ill-health lump sum must use up all of the uncrystallised/unused funds within the pension arrangement.

A person must have some lifetime allowance available at the point the payment is made.

How is a serious ill-health lump sum taxed?

If the person is under age 75, the serious ill-health lump sum will be tax free. If the person is 75 or over, it will be subject to income tax.

If the serious ill-health lump sum exceeds the individual’s remaining lifetime allowance, the excess will be subject to income tax at their marginal rate. This will be deducted and paid to HMRC by the scheme administrator before the remaining lump sum is distributed.