24 NOV 2023

The serious ill health payment option – a useful tool in a time of need

Most people know that the current normal minimum pension age is 55 and taking your pension benefits before this time will normally create quite severe tax charges. However, there are two flexibilities available for those with particular health circumstances, which do allow access at an earlier age, which are not often talked about.

 

The first flexibility is the ill health option, which allows someone to access their pension before age 55 as long as they meet certain criteria. This applies to someone who cannot and will not be able to carry out their occupation.

The second flexibility is perhaps lesser known and this is the serious ill health payment option (or serious ill health commutation). This allows someone at any age to wipe out their pension and take it all in a tax-free lump sum, assuming the value is below the lifetime allowance and they are under 75 years of age.

The serious ill health option sadly accompanies the most difficult of personal circumstances, which is where someone has a terminal illness diagnosis and it is believed that their life expectancy is less than 12 months.

This can be a very challenging subject matter, but it is important for advisers and clients to be aware of this option, because it can be a vital tool for people who have been given the hardest news imaginable, and may allow them to at least access financial resources from their pension when facing a terminal diagnosis. There are a few things to be aware of however. Firstly, for this option to apply, the member will need a written declaration from a medical professional to confirm that their life expectancy is believed to be less than 12 months. At IFGL Pensions, this means in order for us to be able to facilitate serious ill health commutation payments, we will require evidence on headed paper from a GP or consultant with clarification of the member’s medical condition and reason for the prognosis. Secondly, only the value below the lifetime allowance is tax-free. Any additional monies above this level will be taxed at the member’s marginal rate.

The serious ill health option does mean that the pension plan is completely extinguished, so advisers need to plan investment choices with this in mind. Any financial planning involving inheritance aspects may also be impacted, and in some cases monies withdrawn from pension may become liable to inheritance taxes once within member’s estates upon death.

Case Study  

George has received the difficult news that he has terminal cancer and it is not expected that he will survive beyond the next 12 months. He is 53 years of age and has a pension pot worth £930,000. He is understandably worried about providing for his wife and family, but would also like to enjoy his last months and tick off some items from his “lifetime bucket list”.

George speaks to his adviser Lucy and she tells him about serious ill health commutation. This is good news for George who realizes he can withdraw his pension fund and utilise the monies whilst he is still alive, whilst leaving any residual amounts for his family to inherit after he is gone.

Lucy contacts George’s pension provider, who supply the relevant paperwork. George’s GP is contacted and he provides a letter on headed paper providing the relevant declaration and confirmation of the cancer diagnosis, along with a copy of the most recent hospital report.

Within weeks George receives his serious ill health payment.  With his wife, he goes on a trip to California, which he has always wanted to do and treats himself to a sports car, the one that he and his wife always fancied. The remaining funds are invested in a way which will allow  them to be accessed in the short-term but also some growth in the longer term.

Sadly, George passes away six months later and having carefully invested his pension monies, he now feels secure in the knowledge that his wife and family will not struggle financially as they continue their future life journey. Although his family may be liable to inheritance taxes on the money once added to other assets within his estate, which may not have been incurred had the monies been left within the pension trust arrangement, having received comprehensive advice from Lucy, George judged that on balance for him, being able to spend some monies during his lifetime was worthwhile.

This is a difficult topic to deal with, but we hope that this case study helps aid understanding of this critical pension benefit feature.

 

Steve Berridge

Pensions Technical Manager