Focus 120 – Pension provision for members in Ill Health

Pension provision for members in Ill Health

Should a pension scheme member become permanently unable to carry out their current occupation they may be entitled to withdraw benefits from their pension scheme prior to the normal minimum retirement age of 55, with the severity of the condition affecting the options that are available. The notes below are based on HMRC guidance, but you should note that some providers may have stricter requirements, such as applying an “any” rather than “current” occupation stipulation within their scheme rules.

Early Retirement due to Ill-Health

A member may be entitled to this option where:

• A medical practitioner confirms that they will be permanently incapable of carrying out their current occupation as a result of their condition, and
• As a result of their condition the member has ceased their employment

Once qualified medical advice to this effect has been obtained by the pension provider, the member would be entitled to crystallise their benefits using any of the standard options available (Flexi-Access Drawdown, Uncrystallised Fund Pension Lump Sum, etc.) at any age. A lifetime allowance test will apply, however there is no adjustment made to the lifetime allowance to reflect the early retirement.

Serious Ill-Health Lump Sum

A member may be entitled to this option if the conditions above are satisfied and the medical practitioner confirms that the member has a life expectancy of less than a year.

Whilst there is no minimum age for the payment of a serious ill-health lump sum, the member must not have used up all of their lifetime allowance at the point the payment is made, and the payment must extinguish all uncrystallised rights held under the pension arrangement. In these circumstances all uncrystallised benefits can be paid to the member as a tax free lump sum before age 75.  It is important to note that where the amount crystallising exceeds the member’s available lifetime allowance, the excess is subject to a tax charge at the rate of 55 per cent.

Inheritance Tax (IHT)

Pension death benefits will not normally be subject to IHT, however HMRC reserve the right to subject pension death benefits to an IHT charge if they feel they have been used for tax avoidance purposes.

If a member has transferred pension benefits to another pension provider whilst they are deemed to be in ill health, and they subsequently die within two years, HMRC may seek to apply an IHT charge, depending on the rationale for the transfer.

All benefits paid to the member as a serious ill-health lump sum will be treated as part of the member’s estate on death.