Accessing pension savings early due to ill-health: what are the options?

People with serious health problems may be able to access their pension savings early. Ed Monk, associate director for personal investing at Fidelity International, explains the options.

People hit with life-changing medical conditions may be able to use their pension savings to help cope with their new circumstances.

If a health issue is so severe that it prevents a person performing their occupation, they might be able to access pension money early, or on otherwise more favourable terms.

In the most extreme cases - where an individual is given only a very short time longer to live - it may be possible for all money saved to be released, free of tax. In less serious cases, pension savings may be used to fund early retirement for those in ill-health.

There are rules to follow, however, and what’s available will depend on the age and health of the person in question.

Here is an overview that can help people in ill-health understand their options, but individuals are likely to require more tailored information too. The Government’s Pension Wise service offers free, impartial guidance to help you understand your options. You can access the guidance online at or over the telephone on 0800 138 3944.

Many will also benefit from paid-for independent financial advice.

What counts as ‘ill-health’?

Many schemes include a provision allowing those in ‘ill-health’ to access their money early. This typically means if they are unable to perform their job and have stopped working for that reason.

Some schemes are less generous, however, and only give early access if you are unable to perform any occupation at all, as opposed to simply your own. Check the rules of all the pension schemes that you have been a member of over the years to find out what’s available.

Whatever the rules, you will need to prove your health status to your pension scheme. Any health-related issue can potentially qualify, including mental as well as physical conditions, and it doesn’t matter whether it has arisen because of sickness, injury, disability or disease.

The scheme can insist, however, that your ill-health be verified by an expert of its choosing - a note from a GP is unlikely to be sufficient without further corroboration by the scheme.

How much can you get, and when?

Pension options in the event of ill-health depend on the type of scheme in question. All pension benefits taken early due to ill-health are tested against the lifetime allowance - currently £1m in most cases - with charges potentially due if this limit is breached.

Defined contribution schemes - those where contributions are invested to build a retirement pot - do not normally allow access before age 55. This is waived in the event of ill-health, in which case no age limit applies.

In all but the most serious cases (see below), those accessing a Defined Contribution pension early due to ill-health can pull down the money in all the ways they would normally be able to after age 55. That means 25 per cent of the pot is available tax-free with income tax to pay on the rest.

Note that not all schemes allow every type of flexible access. For this reason, it’s possible that you may need to transfer your pot if your scheme does not offer the access you want.

One of the options is to use your money to purchase an annuity - which takes your pension money and provides a guaranteed income for life in return - and this can be particularly beneficial for those in ill-health. That’s because insurance companies are often willing to pay a higher level of income to those in poor health via an ‘enhanced annuity’ - sometimes called an ‘impaired life annuity’ - on the basis that they are statistically less likely to live as long.

For defined benefit schemes - those where an annual income is promised based on a member’s years of service - the scheme will decide what income and tax-free cash is available in cases where pensions are accessed early due to ill-health. This may be higher, lower, or the same as would have been provided had the pension been accessed as normal after the stated retirement date.

If the scheme believes the health condition will shorten the member’s life, it may be willing to pay a higher level of income in the knowledge that it won’t be paying it for as long. If the condition does not shorten life expectancy, it is likely the scheme will pay a lower income on the basis that it may have to pay it out for longer than was assumed.

A defined benefit scheme may also factor in any other benefits it provides to members in the event they cannot work, such as health insurances or income protection.

For cases of ‘serious ill-health’

If your health condition is so serious that you are only expected to live for a short time, the rules around accessing pensions early are loosened even further.

This is reserved only for the most serious illnesses - those where an individual is given 12 months or less to live. Once again, pension schemes can insist on their own verification of this.

If these conditions are satisfied, members of defined contribution schemes under age 75 can usually get the whole value of their pot in one go if they wish, with no tax to pay.

If you are over age 75 when serious ill-health strikes, any pension savings that have not been taken already can still be accessed, although income tax would be due.

Members of defined benefit schemes suffering serious ill-health may find their scheme provides a ‘serious ill-health lump sum’. Benefits may vary if you are no longer an active member of the scheme.

Some people in defined benefit schemes may find their needs are best served by transferring their pension to a defined contribution scheme where there are greater options for accessing money flexibly. This can be a complex decision and may have inheritance tax implications.

Any transfer worth £30,000 or more must be subject to financial advice, which should establish what other benefits, including death benefits to surviving spouses and dependents, are at stake by transferring a defined benefit scheme.

Getting the state pension early?

Unfortunately, there is no option for individuals to access their state pension entitlement before their prescribed state retirement age, although there may be other health-related benefits they can claim.

Ed Monk is associate director for personal investing at Fidelity International

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