This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
Pension benefits can be taken earlier than age 55 due to ill-health whilst benefits can be taken as a lump sum due to serious ill-health at any age. Although there is HMRC guidance covering both scenarios, the rules of a particular scheme will set out which options are available in practice.
Where a member is, and will continue to be, medically incapable of carrying on with their current occupation, because of injury, sickness, disease, or disability, then they may be able to take their pension benefits earlier than the normal minimum pension age of 55 (increasing to 57 in 2028).
A registered medical practitioner must provide the scheme administrator with written evidence of ill-health. HMRC guidance states that the member must have stopped working in his or her own occupation to take benefits early under the ill health option. However, scheme rules may have a stricter definition of ill-health and may insist that the client is unable to continue with ‘any’ occupation as opposed to their ‘own’ occupation before they will pay pension benefits early. In practice, for ill-health claims, a declaration that must be completed by a registered medical practitioner will normally be included as part of the retirement quote. The completed declaration will then have to be reviewed and accepted by the provider to allow the pension benefits to be paid early on ill-health.
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.
Section 9(2B) rights (held in an occupational pension scheme or a section 32 buyout) can be taken early on grounds of ill-health (with a tax-free lump sum available as normal). However, GMP benefits can only be taken early if the revalued GMP liability at age 65 for men and age 60 for women is met. No tax-free lump sum can be taken from GMP benefits.
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.
Any new drawdown arrangements set up on or after 6 April 2015 will be flexi-access drawdown, with one exception - a new capped drawdown arrangement can be set up to accept a transfer from an existing capped drawdown arrangement.
When an individual satisfies the 'ill-health condition', the benefit options that are available to them at their early retirement date are exactly the same options that would apply from normal minimum pension age (currently 55), subject to the rules of the relevant scheme.
If a member subsequently recovers from ill-health, scheme rules may allow an ill-health scheme pension to be stopped or reduced. For more information on how this is treated please refer to the HMRC guidance here.
Note – a scheme pension is typically paid from a final salary scheme but can also be set up from a money purchase arrangement although this rarely happens in practice.
Members suffering from serious ill-health, defined by HMRC as having less than a year to live, can take their uncrystallised pension funds (those that have not been put into payment) as a lump sum at any age. The lump sum paid is referred to as a serious ill-health lump sum.
A serious ill-health lump sum can be paid subject to the following conditions:
- before the payment is made, a registered medical practitioner must provide the scheme administrator with written evidence stating that the member’s life expectancy is less than a year. In practice, a declaration that must be completed by a registered medical practitioner will normally be included as part of the retirement quote sent to the customer. The completed declaration will then need to be reviewed and accepted by the provider to allow the serious ill-health lump sum to be paid.
- the member must have some lifetime allowance left (even if the serious ill-health lump sum is paid after age 75). This doesn’t need to cover the full amount of the lump sum. The amount exceeding the available lifetime allowance would be taxed at the individual’s marginal rate of tax,
- the payment must commute all of the uncrystallised funds held in an arrangement. If part of the arrangement has already been crystallised, the full amount of remaining uncrystallised funds must be commuted. If no part of the arrangement has previously been crystallised, all rights under the arrangement must be commuted to pay the serious ill-health lump sum.
Sufficient funds must be kept back to provide the required survivor’s benefits from any guaranteed minimum pension (GMP) and section 9(2B) rights. If the GMP or section 9(2B) rights held back to provide a spouse’s or civil partner’s pension are clearly identified and held in a separate arrangement from those rights being commuted, the condition that all funds under the arrangement must be commuted will be met.
Member under age 75 at date of payment
Member aged 75 or over at date of payment
The lump sum is paid tax-free, subject to it being within an individual’s remaining lifetime allowance. See ‘Testing a serious ill-health lump sum against the lifetime allowance’ below for more information.
The lump sum will be taxed as pension income (that is, at the individual’s marginal rate of tax).
The payment of a serious ill-health lump sum before age 75 is tested against the lifetime allowance as a BCE6. The lump sum is tax-free apart from any amount over the member’s remaining lifetime allowance, which will be subject to tax at the member’s marginal rate of tax (assuming the member doesn’t have enhanced protection). The scheme administrator will deduct the tax due before the lump sum is paid. If the scheme administrator doesn’t have a tax code for the member, they should deduct tax using the emergency tax code on a Month 1 basis. The member will have to reclaim any overpaid tax directly from HMRC.
The payment of a serious ill-health lump sum after age 75 is not a BCE as any uncrystallised funds remaining at age 75 will have already been tested against the lifetime allowance at that point. However, for the purpose of checking whether a member has available lifetime allowance, the fact that a BCE 5 or 5B has been done at age 75 is disregarded.
HMRC defines a registered medical practitioner as ‘a fully registered person within the meaning of the Medical Act 1983’. Where a member is not in the UK, the registered medical practitioner can be someone with equivalent overseas qualifications. HMRC always expects that a member in the UK would need to have evidence from a UK registered medical practitioner.
HMRC guidance on ill-health and serious ill-health benefits can be found at: