Ill-health retirement: a guide to medical retirement and pensions

What is ill-health retirement?

Ill-health retirement, also known as medical retirement, is when an individual is unable to complete employment up to their pensionable age. This can be because of either a physical or mental illness, injury, or disability.

Unfortunately, ill health can scupper retirement, causing individuals to take early retirement. Luckily, there are schemes and measures in place for those out of work and facing ill-health retirement.

Whilst many plan to take their pension when they reach retirement age, there are options for those who are unable to wait until they hit pensionable age. After all, personal pensions and self-invested personal pensions (SIPPs) aren’t restricted by retirement age in the same way a workplace or State pension is. 

Instead of waiting until your late 60s, retiring under ill-health could entitle you to take a personal pension early. Otherwise, you can choose to access all or part of your pension fund, if you are in good health, by the minimum pension age set by HMRC. This is currently age 55 but is set to increase to age 57 in April 2028. However, you may have a protected early pension, aged below 55, if you started your pension before April 2006 and were in a special occupation.

How does ill-health retirement relate to pensions?

If you are forced to take early retirement (prior to 55) due to ill health, you’ll need a means of income to keep you going. As a result, if you qualify, you may be able to access your pension early. 

Who is eligible for ill-health retirement?

Medical or ill-health retirement can only be awarded to someone who fits the criteria of HMRC, your pension provider and - if you are in a workplace scheme - your employer. Providers tend to have varying eligibility criteria, so it’s worth looking at the details of your policy and what the provider’s stance is before you make a claim. You will also need involvement from a doctor and, possibly, a solicitor.

What medical conditions qualify for ill-health retirement?

You can qualify for ill-health retirement if you have a disability or health issue that prevents you from being able to do your job. It’s important to note that individuals looking to take early retirement are not restricted by their age, so you could claim when you’re 33, for example.

HMRC offers specific eligibility criteria that must be completed and fulfilled before medical retirement can be confirmed.

The requirements are as follows:

• Written medical evidence sent to and received by the pension scheme administrator.
• Written medical evidence that the member is expected to live for less than one year or is medically incapable of continuing their occupation.
• The individual ceases working.

Medical evidence from a doctor is the most important part for those looking at ill-health retirement. You’re unlikely to receive medical retirement status without it. 

From the medical evidence supplied, you’ll need to satisfy your provider’s criteria for medical retirement. Your pension provider will share any qualifying criteria with you, and you might be asked to supply additional evidence in some cases. Alternatively, you’ll get entered into a tiered system if you’re part of a Local Government Pension Scheme. This system will determine if you have a serious ill-health condition (SIHC), such as a terminal illness, which could mean all your pension benefits can be paid to you as a tax-free lump sum.

How to apply for ill-health retirement

Applying for ill health retirement is never a decision that’s taken lightly and requires input from you , a doctor and, if you are in a workplace scheme, your employer . If you feel unwell or unable to complete your work to any capacity, you could be entitled to medical retirement.

1. Liaise with your financial adviser

Retiring earlier than you’d planned can be expensive. It’s for this reason that we always advise speaking to your financial adviser. Whilst you might not have a choice to retire, they will offer supportive and friendly advice for what to do next.

2. Speak to a solicitor

Contact your solicitor before you speak to your employer. As a lot of evidence is needed to determine medical retirement, a solicitor can help you build your case.

3. Contact your employer or pensions provider

If you feel your illness or disability is going to affect your capacity to work, you must communicate this with your employer. Doing so will start the motion of medical retirement. You should document every conversation with your employer, so you have a record of everything that has been said. Alternatively, you can speak to your personal pension or SIPP provider, who will be able to assist with your claim. They’ll walk you through everything you need to do, taking some of stress away from ill-health retirement.

4. Secure medical evidence

Any supporting evidence must be provided by a registered medical professional who is licensed to operate. If you have a personal pension or SIPP, your provider can request this evidence from your GP, but only if you give permission to do so. You should also have the option to see the report before your provider reviews them if you wish. In a workplace scheme, it’s possible that your employer might also seek advice from an occupational health expert.

5. Receive and store documentation

It’s important to note that any evidence and documentation will need to be stored for at least six years. Pension providers will need a record and might require you or your family to hold a copy too.

6. Start accessing your pension

If your claim is successful, you’ll be able to start accessing your pension. 

Examples of ill-health retirement

Ill-health retirement is often unexpected, but it’s not always a permanent solution. In some instances, you might find that your physical or ill-health improves over time, allowing you to return to work. It’s always advised to seek legal advice, especially if you are in a workplace scheme and want a watertight case to submit to your employer.

1. Disability

The severity of your disability could force you into early retirement. In the instance that this is necessary for you and you are part of a workplace scheme, you’ll need to communicate this with your manager and employer’s HR team. Under the Equality Act 2010, you can’t be fired, made redundant or dismissed for having a disability. However, if you determine that meaningful work can’t be completed due to your disability, you’ll need to submit medical evidence in support of this to your employer.

2. Physical ill-health

Long-term physical ill health conditions, such as arthritis or diabetes, can affect your capacity to work. To some, these are also known as chronic illnesses. At points, your physical health can restrict your ability to complete paid work. If it severely impacts your capability to do a job, it could prompt medical retirement. 

Once you’ve raised your case and submitted evidence, your private pension provider might have set criteria you need to fall into before you can start claiming. These could include proof that you’re incapable of working or that there are no medical treatments available to help you return to work. 

3. Mental ill-health

Severe anxiety, post-traumatic stress, and depression are all examples of mental ill-health that can affect your capacity to work. In some instances, they might also be grounds for medical retirement. Mental ill-health will need to be documented by your doctor and written evidence should also be submitted. 

4. Terminal illness

For those with serious ill-health, such as cancer or heart disease, it’s possible to receive your pension pot in full as a tax-free lump sum. In this circumstance, you’ll need written evidence that your life expectancy is less than one year. You’ll also need to be under the age of 75 years old to claim your full pension tax-free. If you’re diagnosed with a terminal illness over the age of 75 years old, your pension lump sum will be taxed as income.

What is the annual allowance tax charge for ill-health retirement?

When you retire due to ill health, you could receive an enhancement to your pension benefits. Unfortunately, this enhancement could trigger an Annual Allowance tax charge.

The annual allowance is the maximum amount someone can save into their pension each year without an annual allowance charge applying. This considers everything you have saved, as well as your employer’s contributions. Individuals with severe ill-health conditions may be exempt from the charge.

An annual allowance applies to all private pensions and not state pensions. Annual allowance charges will start once you have saved up to £60,000 into your pension pot. If you earn less than £60,000, your annual allowance will be limited by the amount you earn in that tax year. If you’ve exceeded your annual allowance in the current tax year, it’s possible to carry over any annual allowance you haven’t used within the three previous tax years. There are some restrictions to this though. If you weren’t in either a UK or recognised overseas pension scheme for one of those tax years, you also can’t carry forward allowance. Your earnings for the tax year will also need to be at least equal to the amount you want to contribute including any carry forward amount.

It's possible that you might have an annual allowance that is lower than £60,000. This occurs when you earn less that £60,000, you’ve already accessed a money purchased pension pot or if you have an income above £260,000.

Options for ill-health retirement

It’s best to prepare for anything and everything. Retirement can seem so far off, particularly if you’re in your 20s, 30s or 40s. However, it’s never too early to consider your choices. In the future, you will be grateful you did prepare.

A financial adviser

Before making any decisions around pensions, annuities, or retirement plans, it’s important to speak to a financial adviser first. They’ll be able to take a deep dive into your financial situation and make unbiased recommendations on products to best suit you.

Enhanced annuities

An enhanced annuity could be ideal if you need to take ill-health retirement, especially if you are aged 55 or older. A lump sum is paid from you to a provider, offering you a regular income. You can receive an enhanced annuity if you’re experiencing poor health or a life-limiting illness.

Fixed term annuities

Medical retirement can be unexpected, which is why preparing for any eventuality is important. With a fixed term annuity, you can receive a guaranteed income without committing to a lifetime scheme. What’s more, you can select the level of flexibility you need and are in total control of your plan.

Pension schemes

Ensuring you are signed up to a workplace or private pension scheme, especially earlier on in your working life, will give you flexibility as you get older. You may also be eligible for a State Pension alongside any private pension.

If you’re looking for a personal pension or a self-invested personal pension (SIPP), this is something we can help you with at LV=. 

Additional Savings

Every little helps when saving for retirement, which is why additional savings are always a good idea. Before reviewing products on the market, speak to your financial adviser and work out what you can afford to put away each month that you won’t need to access.

Can LV= support those retiring due to ill-health?

Absolutely! At LV= we recognise that ill-health retirement comes with a lot of worry and complication, which is why we offer a selection of services that can help you. From annuities to investments, we may have the right solution for you. Request a callback today. 

*Sources: 

https://www.lv.com/-/life/media/pdfs-lvfs/life-articles/wealth-and-wellbeing-ed-12.pdf