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Lisa Webster: Transfer troubles with ill-health early pensions

Clients that suffer ill health at a young age can access their pension if certain requirements are met

With the recent news that we are not living longer after all, there are questions to be asked as to why this is. Life expectancy increases the older you get, as the fact you made it that far boosts your chances of living to a riper age.

For instance, a child born today can expect to live to 83 if female and 79 if male, whereas a 65-year-old can expect to live to 86 or 83 respectively.

The biggest increases in life expectancies arose in the first half of the last century due to improvements in immunisation programmes and significant reductions in infant mortalities.

Nowadays, the challenge for continuous improvement is more likely to be met by advances in treatment for the likes of heart disease and cancers in middle age.

Early access

For those that do suffer ill health at a relatively young age, accessing their pension may be an option if certain requirements are met.

Rachel Vahey: Pension rules on early retirement due to ill health

Hopefully, your clients are all fit and well but if you do have one that finds themselves too ill to work, then, providing there is medical evidence their condition renders them incapable of carrying out their occupation, taking benefits before age 55 is possible.

Bear in mind some scheme rules may be more stringent, though, with requirements that the client must be incapable of carrying out any occupation at all (i.e. someone who could not do a physical job due to illness or injury but could still do a desk job would not qualify).

Job changes

Things can get a little more complicated when it comes to transfers, too. Take the example of Mr Jackson, who has a condition at the age of 50 that prevents him from continuing in his current job. He has some investments, which he lives off until the age of 52.

During this period, he decides to consolidate his various pensions into a Sipp to make them easier to manage. He then wants to take some funds from his pension.

At the point he joined the Sipp he had already stopped working and the legislation states that, to access pension benefits before age 55, the ill health condition must be met: that is, he must be (and continue to be) incapable of carrying out his occupation.

Would giving savers information about pension transfers open Pandora’s box?

This could be seen as a problem considering that, under the new scheme, he does not have an occupation. However, we have had confirmation from HM Revenue & Customs that it is acceptable to look back at the member’s previous occupation in this scenario.

Another scenario is that Mr Jackson ceased his original occupation and accessed benefits under his original pension scheme. After a few months, he started a less strenuous job working part time, which is manageable with the condition he has.

His pension does not have to stop (unless the scheme rules state he cannot carry out any occupation) but if he then wants to transfer his pension at the point he joins a new scheme, his occupation is the new part-time job.

When he wants to take his first benefit payment under the new scheme, he would therefore not meet the ill health condition and would have to wait until his 55th birthday to take further benefits.

IHT hurdle

There is also the issue of inheritance tax with transfers in ill health.

If the member has made a transfer in the two years prior to their death, and they were in ill health at the date of the transfer, this can be classed as a lifetime transfer and IHT may apply. The definition of ill health in the context is less clear than when accessing benefits: it is IHTA 1984 that is relevant, not the pension rules themselves.

Steve Webb: A perfect storm for DB transfer complaints

There is an exemption under s10 IHTA 1984, whereby if it can be shown the disposition was not intended to confer any gratuitous benefit on any person, then it will not be a transfer of value and therefore no IHT will apply. In layman’s terms, if you can show the transfer is for the member’s benefit in their lifetime, you should be able to use this exemption.

Lisa Webster is technical resources consultant at AJ Bell



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