Am I entitled to early retirement due to ill health?

Early retirement due to ill health is possible, but how will you secure an income when you decide to not work anymore? This is a crucial decision.

Depending on the terms and conditions of your pension, you might be eligible to access your pension money earlier than usual. Financial stability and security is possible when you can no longer work anymore because of poor health.

You should weigh your options carefully. Which will it be for you?

What is ill-health retirement?

If you get ill and unwell before your retirement age, and you're suddenly unable to work you might be eligible to access your retirement funds early.

As of 2021, you can access your State Pension at 68 and private pension at 55. If you need to retire early and reasonably can't work further, you are entitled to your pension earlier than the set retirement age.

You will have to check with your pension provider as there are rules and regulations that have to be followed in regards to receiving your pension earlier than most people, such as working a minimum amount of years. You should also be able to provide medical proof of your condition that prevents you from working and earning a salary.

Can I claim my State Pension early due to ill health?

Unfortunately, this is not possible, even if you can prove that you are medically unwell to work and unable to financially support yourself further in the future. Fortunately, there are some benefits, such as Statutory Sick Pay (SSP) or Universal Credit that you can access to help you during this difficult period.

Can I get an ill health pension from a defined benefit scheme?

Depending on your pension provider and the regulations around receiving your pension, you might be able to receive your pension under a defined benefit scheme.

A defined benefit pension scheme is a way of paying into your workplace pension. Payments into your pension pot under this scheme are based on your final salary or your career average salary. You know exactly how much pension income you will be getting during your retirement.

Under this type of scheme, if you take your pension early, usually the amount of money you get is reduced because you won't have as much time to invest in this pension pot.

Can I take the whole pension pot?

Under this scheme, you might also be able to withdraw your whole pension pot. This is called a trivial lump sum and you are eligible for it mainly due to early retirement and ill health.

You can withdraw a trivial lump sum due to ill health only if the value of your combined pension schemes is not over £30,000. A trivial lump sum also requires you to be eligible for it based on the rules explained here. There is a tax implication to this trivial lump sum withdrawal, with the first 25% of the lump sum amount allowed to be drawn tax-free. The remaining 75% of the amount is taxed at your marginal tax rate. Further information on tax implications can be found here.

Can I get an ill health pension from a defined contribution scheme?

Yes, if your pension provider and the rules they've set allow it. You need to contact them to find out what your rights are.

Early retirement due to ill health, if supported by medical proof, is usually accepted as a reason to start taking your pension earlier than usual.

You need to prove that you are:

·         Physically or mentally unable to work anymore

·         There is no further treatment or medication that could treat you and help you get back to work.

You fill out a form and then the pension scheme’s medical examiners will decide if you qualify for an early pension. In such a case you would normally have the same options and tax treatment for taking your money as you would normally have at the age of 55.

If you’re terminally ill (serious ill-health), it is possible for you to take a lump sum tax-free - check with your pension provider for more details.

How about voluntary redundancy rather than early pension?

Voluntary redundancy is different to a pension and it could be a valid option for you if you need to retire early.

Take into consideration that you need to:

·         Speak to your employer and agree on an amount that represents the value of your work as well as on an amount that is suitable for the remainder of your time until you get your pension

·         Look into the tax arrangements on your redundancy pay as regulation states that only £30,000 is untaxed.

·         Budget the money very carefully for it to last until you start receiving your pension.

You need to be very careful and aware of your decision as this is the point where you define your financial future. Are you going to accept a pension or a voluntary redundancy?

How about a pension annuity?

Pension annuity is another solution to your financial woes when it comes to stopping work early or being unable - physically and mentally. An annuity is a financial product and insurance contract by pension providers that guarantees a certain amount of income for a set period of time, depending which package you purchase.

There are several types of pension annuities to consider such as:

·         Lifetime annuity - which guarantees you an income for a lifetime

·         Temporary annuity - which guarantees you an income for a fixed amount of time

·         Or enhanced annuity - a higher income due to illness or short life expectancy.

The most common process of purchasing an annuity is by withdrawing a 25% lump sum tax-free from your pension, and with the rest of the pension money in your pot you buy a lifetime annuity and you secure an income for the rest of your life.

As you're looking to retire early due to illness, an enhanced annuity could be a great decision for you too.

This type of pension annuity provides a safety net around your financial future. Because, for instance, if your pension that you contributed into based on a defined benefit scheme runs out, you are suddenly left without an income at an old age. But with an annuity, you are financially secure for life.

Consider other sources of income

Are there any other ways you can secure an income? You can stop working full-time relatively early but have an income that is not based on your pension. For instance you might consider part-time work at home where it is more flexible, not full time and a more relaxing and easy way of working.

Self-employment could be a good option for you, since you would be able to work from the comfort of your own home.

Instead of resorting to receiving your pension early, you could secure an income by working less hours if possible and if your health permits it.

Which is the best option for you?

Take the time to really evaluate your options before retiring early. Check the rules of your pension provider's pension scheme. Consult a financial advisor for legal and financial guidance, if you're not sure which option is the best for a stable financial future.

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