Facing a serious illness can be overwhelming, especially when it comes to managing your finances. For many, the option to access pension savings early can provide much-needed financial support during a difficult time. However it can also drastically impact your retirement. So it’s important to understand the potential benefits, implications and rules around doing so.
Most pensions can’t be accessed before age 55 (rising to 57 from 2028). If you’re seriously ill or have an accident you may be able to access it earlier. How you take your pension will depend on what type of pension you have.
If you get sick and have a defined benefit pension
Defined benefit pensions, also known as final salary schemes, are a type of workplace pension that pays you a retirement income based on your salary and years of employment. These pensions are getting rarer but if you started saving 25 years ago or work in the public sector, you may have one.
If you get sick or develop a disability that means you can no longer work, then you may be able to get your defined benefit pension paid earlier. You’ll need to:
give your pension scheme evidence that you’re medically, physically, or mentally incapable of continuing in your job as result of injury, sickness or disability; or
you’ll have to satisfy the trustees who run the scheme and the sponsoring employer that you can no longer work.
The application process can be time-consuming but if you meet the scheme’s ill health payment conditions then you might be able to take your pension as a regular income. Each defined benefit pension is different, some schemes may reduce the pension you get, whereas others might increase your pot. This could happen if you’re an active member when you become unwell or, if your condition is terminal.
Keep in mind that some schemes will stop paying out your pension if you recover, so it’s best to check with your employer on their exact rules.
If you get sick and have a defined contribution pension
If you have a defined contribution pension, including personal and workplace pensions, the rules are different.
These schemes are run by pension companies and are based on how much you’ve contributed, rather than your salary and length of employment. So just keep in mind that if you start accessing it early, you’ll still need to leave enough to last you in retirement.
With a defined contribution pension, your options for early withdrawal are:
to buy an annuity to guarantee your income, but these are expensive to buy if you’re under 55; or
to choose pension drawdown and take some of your pension, leaving the rest invested. You’ll still be entitled to take 25% of your pension as a tax-free lump sum, the rest will be subject to income tax.
As with a defined benefit pension, you’ll need to provide your pension provider with evidence you’re no longer able to work. It’s then at their discretion how much you’re able to access - for example, it could be a tax-free cash sum or reduced pension. Check for exact terms and conditions with your provider.
If you’re a PensionBee customer, you can find out more about what qualifies for early withdrawal on ill health grounds.
If you do start withdrawing from your pension early, it may affect your ability to claim benefits. You can check if you’re eligible for any state benefits using this calculator. It could be more worthwhile to keep your pension invested and claim benefits to support you while you’re sick. This way you’ll continue gaining National Insurance (NI) contributions, which count towards your State Pension entitlement.
What happens to your pension if you’re terminally ill?
If you’re diagnosed with a terminal or life-limiting illness, then the same rules apply whether you’re in a defined benefit or defined contribution scheme.
If you have less than 12 months to live then you may be able to receive a serious ill health lump sum. You can receive a serious ill health lump sum at any age as long as you’ve yet to withdraw anything from your pension (referred to as an uncrystallised pension). This is effectively an early lump sum death benefit payment where:
you can withdraw up to £1,073,100 without having to pay tax;
you’ll pay tax at your marginal rate on withdrawals over £1,073,100;
your marginal rate considers any other income you earn; and
if you’re over 75, taking a serious ill health lump sum is taxable.
When funds are withdrawn from your pension, they form part of your estate. This means when you pass away, your loved ones will have to pay Inheritance Tax (IHT).
Can I access the State Pension if I get sick?
You can’t access your State Pension earlier than the current State Pension age (66 rising to 67 from 2028) even if you get sick. If you’re unable to work because of ill health or an accident you may also want to check what benefits you’re entitled to, including Statutory Sick Pay (SSP) and/or Universal Credit.
Samantha Downes is a financial journalist and has written for most national newspapers and women’s magazines. She’s also the author of two finance guides and has set up the Substack PumpkinPensions to help guide people looking to save more towards their future.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
