Ill health retirement: the qualification criteria explained
31st Jan 2024 Pensions & Retirement
5 min read
If you’re struggling to work due to a health condition or disability, you may be able to claim your pension before the age of 55 and retire early.
However,
you’ll need to meet strict criteria, and it’s advisable to get independent
financial advice so you can make sure you can afford early retirement without running out of
money.
Early retirement due to ill health: what is it?
Ill health
retirement, which is also known as being ‘medically retired,’ is when you are allowed
to draw your
pension before the age of 55 (or the scheme’s ordinary retirement date) due to sickness,
disability or another medical condition.
It will usually
be a condition that means you can no longer continue to work in your normal
job, or one that significantly reduces your earning potential.
Your
pension scheme may set its own criteria around the conditions that would allow you
to draw your pension early.
You have
the right to ask your employer to make reasonable adjustments to make sure
you’re not disadvantaged at work as a result of a medical condition or
disability.
If you can
continue working with these adjustments, you might not need early retirement,
but there are many conditions where no such adjustments are possible.
In this
scenario, you will need to ask about taking your pension earlier than
anticipated.
Ill health retirement: what conditions qualify?
Different
schemes have different rules and criteria for ill health retirement.
You’ll usually
need to:
·
Establish that you’re permanently incapable of continuing your job due
to a physical or mental condition.
·
Show there are no treatments or medications that could allow your return
to work before the normal pension age, which could apply to your current role
or alternative employment. Some schemes will consider whether you’re working
full or part-time and may suggest part-time work as a solution.
·
Apply while you’re in pensionable
employment for
maximum benefits. While this isn’t essential, it’s recommended.
Many schemes
emphasise rehabilitation and reasonable adjustments by employers to enable your
return to work.
If your
employer is able to help you return to work, your application is less likely to
succeed, but if they offer a different role or fewer hours, you may be able to
apply for ill health retirement from your original position.
What if I have a terminal illness?
If your
life expectancy is less than one year due to a serious illness, you may be able
to take the whole of your pension pot as a tax-free lump sum if it is a defined
contribution scheme.
You would
need to be under the age of 75 to do this (over the age of 75 the lump sum will
be taxed like ordinary income), and your doctor will need to confirm your
condition.
Can I claim my state pension early due to ill health?
It isn’t
possible to get your state pension before the state pension age, even if you
have poor health or a shortened life expectancy, but you may be able to get
help with day-to-day living costs.
If you have
a serious physical or mental health condition, check to see if you’re entitled
to state benefits, including statutory sick
pay, employment
and support allowance, or universal credit.
Each has
its own eligibility criteria, and you’ll need copies of the below to apply:
·
Savings
·
Income and payslips, including your partner’s
·
Existing benefits and pensions, which includes anyone living with you
·
Outgoings such as rent, mortgage and childcare payments
·
Council tax bill
If I retire due to ill health, what benefits can I claim?
Depending
on your pension scheme, a health condition may allow you to access your pension
early, or receive higher payments and tax credits.
If you have
a personal or workplace pension, you may be able to claim the full lump sum of
your pension
tax-free if
you meet the criteria.
With a
state pension, you’ll need to wait until you reach state pension age before getting
any benefits.
If you have
little or no pension savings, explore other state benefits such as employment
and support allowance or council tax
reduction.
What is the process for drawing my pension due to ill health?
The
criteria and process for each scheme differ, so you need to ask your provider
what they need from you.
It’s a good
idea to talk to an independent financial adviser (IFA) as they can guide you through the process.
The steps
usually include:
1.
Fill out a copy of the ill health retirement application form from your
pension scheme and provide medical proof confirming your condition. This could
be a letter or signature on the application form from your doctor. You may also
need an independent professional assessment from medical advisers.
2.
Get confirmation from your employer that ill health is the only reason
for your retirement.
3.
Once your application is complete, your provider will award the
benefits, request more evidence, or reject your application. The scheme will
need to provide detailed reasons for rejection, so you can appeal if you don’t
agree. If you appeal, ensure you do so within the timeframe and remember you
may need to provide fresh medical evidence.
Will I be entitled to an enhanced annuity?
You may be
able to apply for an enhanced
annuity if
you have a qualifying health condition, or have done so in the past, or have
any lifestyle issues that may shorten your life expectancy.
An enhanced
annuity, which is also known as an impaired life annuity, pays a higher
guaranteed income than a regular annuity, as you are considered to have lower
than average life expectancy.
Various
health conditions and lifestyle factors may qualify you for an enhanced annuity.
So, even if
you believe you’re in reasonable health when you retire, it is worth talking to
a financial adviser to see whether or not you may qualify for one.
Can I afford to retire early due to ill health?
If your
health condition is bad enough that it is preventing you from doing your job,
then you may not have a choice about whether or not to retire.
However,
you can still ask whether you can afford to retire early by looking at other
areas of your life, to see what savings you would need to make in order to stop
work.
But don’t
forget, if you draw your pension early, it may have to last longer than it
otherwise would.
A health
condition or disability that stops you from working may not shorten your
lifespan, so you would need to calculate how to make your pension last long
enough.
Unbiased’s pension calculator can help you do this,
although you may also want to look at other sources of income such as remortgaging, equity
release and downsizing.
Once you
know how much income you can generate from your pensions and other assets, you
should have a good idea of any adjustments in your spending that you may need
to make.
Early retirement due to ill health FAQs
Can I get
an ill health pension from a defined benefit scheme?
If you’re
suffering from permanently ill health, most defined
benefit schemes are
likely to pay your pension early.
As this
means less time for your pension to grow, some may reduce the pension you will
get. It’s worth checking your scheme’s terms and conditions.
Can I get
an ill health pension from a defined contribution scheme?
Defined
contribution schemes often give you your benefits early in the case of ill
health.
You may be
given allowed to take your benefits as a pension, or a tax-free lump sum,
depending on your circumstances.
But if you
are over 75 at the time, then your pension will be taxed in the normal way.
If I become
semi-retired due to ill health, can I access my pension early?
You can
return to work if you retire from ill health, but if you have begun to draw
your pension early due to this, you cannot return to the exact role you retired
from, unless you reduce your hours.
While you
can return to a new role, remember that returning to work will impact your
benefits, so read the restrictions carefully.
Can I claim
my NHS pension or teacher’s pension early due to ill health?
NHS workers
and teachers in
the UK can
claim their pensions before retirement age due to ill health, usually without
the usual reductions applied to early retirement pensions.
Both have
their own rules, criteria and restrictions, so do some research or ask your
employer about their policies.
If you have
an NHS pension, make sure you get the most of it by getting pension advice from a financial adviser.
If you
think you may need to retire early due to ill health, talking to an independent
financial adviser is a good idea. Unbiased can quickly connect you to the best
financial adviser for you.
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