Can I cash in my Pension early due to ill health?
Advice you can trust
Cashing in your Pension Early Due to Ill Health
If you are in poor health and can no longer work you can cash in your pension before 55, commonly known as an Ill Health Pension.
There are two types of circumstances for cashing in your pension early due to ill health:
- Early retirement due to ill health where you are unable to continue to work.
- Serious ill health where you are not expected to live for more than a year.
If you have a defined benefit pension or final salary pension with your former employer, their scheme will have rules on accessing your pension due to ill health.
Early Retirement due to ill health
If you can no longer carry out your “normal occupation” due to ill health issues you can access your pension before 55. It is worth noting that some pension scheme have stricter rules than others on accessing your pension early. The term “normal occupation” can have different definitions depending on your pension provider. For instance, if you cannot carry out your normal occupation but can continue to work in a new position, then further information will need to be provided.
If you cannot continue to work at all then you will be able to access your pension early. If you are in ill health you may be able to access larger pension benefits because your life expectancy would more than likely be reduced.
Serious ill health
If you have been diagnosed with a serious illness with life expectancy of less than a year you will be able to access your whole pension as a serious ill-health tax free lump sum at any age. The requirements are:
- You’re under 75 (if you’re over 75 you pay Income Tax on the lump sum).
- You don’t have more than the lifetime allowance in your pension funds.
- You must have written evidence from a registered medical practitioner that you have less than 12 months to live.
- Your pension benefits must be uncrystallised.
- The payment of the benefits must extinguish all uncrystallised rights.
- You must have some unused lifetime allowance.
You will need to provide full medical evidence about your illness. Your pension scheme provider will want to see your medical history. The evidence will need to be provided by a medical practitioner who is fully-registered under the Medical Act 1983.
If the evidence comes from an online medical services provider via a web chat or video call then further evidence will be required.
Defined Benefit Pension Transfer
If you are in ill health and have a defined benefit pension, if your condition isn’t bad enough to benefit from any early retirement options direct from the scheme, then you can usually transfer out of the scheme into a personal arrangement. This will give you greater flexibly on how and when you can access your pension fund. It will also give you potentially improved death benefits.
The benefits of transferring your pension to a new arrangement include:
- Flexible Retirement Options: You will have more choice and flexibility in how much you take and when you take it.
- Improved Death Benefits: You will be able to leave 100% of your pension fund to whomever you like.
- Cash Lump Sum: You can take a 100% cash lump sum – the first 25% is tax free. The rest is taxed at your marginal tax rate.
The rules on how to access your pension benefits early due to ill health depends upon your pension scheme rules and your personal circumstances.
Ill Health Pension Resources
Below are some useful Ill Health Pension resources:
- The Pension Advisory Service – Ill health
- Money Advice Service – Early retirement because of illness or disability
- Pension Wise – Ill health and pensions
- Pension Wise – Your pension when you die
- The Government – Taking your pension early because of ill health
- Macmillan – Accessing your private pension early
This service only applies to pensions in the UK. Taking benefits early will almost certainly reduce your pension income in retirement and is only suitable for a limited number of people and circumstances. This should not be seen as an easy option for raising cash.
If you release all your money from your pension early you will not have anything left to provide you with income in retirement. Usually 25% of your pension can be released tax-free, the balance is taxed at your marginal rate at the time of release, this marginal tax rate could change in the future.
Access your pension early due to ill health – Advice
Grove Pension Solutions Ltd is regulated by the Financial Conduct Authority.
We were established in 2007 so have many years of experience successfully helping 1000’s of individuals. Some of them we advised to transfer their pensions and some of them we advised to leave their pensions where they are and not transfer them.