Updated 26 July 2022
If you have a health condition or disability that makes it difficult to work, you may be able to claim your pension before the age of 55 – and so retire early.
However, you’ll need to meet strict criteria, along with independent financial advice to ensure you can afford early retirement without running out of money too soon.
Ill health retirement – also known as being ‘medically retired’ – is when you are permitted to draw your pension before the age of 55 (or the scheme’s ordinary retirement date) due to sickness, disability or other medical condition. Typically, it will be a condition that means you can no longer continue to work in your normal job, or one that seriously reduces your earning potential. Your pension scheme may also set its own criteria as to what conditions would entitle you to draw your pension early.
Remember, you have the right to ask your employer to make reasonable adjustments to ensure you’re not disadvantaged at work due to a medical condition or disability. If these adjustments make it possible to continue working, you might not need early retirement. There are of course many conditions where no such adjustments are possible – in which case you will need to enquire about taking your pension earlier than anticipated.
Like the definition of ill health, different schemes have different rules and criteria for early retirement. Generally, you’ll need to:
Schemes are putting greater emphasis on rehabilitation and reasonable adjustments to enable your return to work. If your employer is able to facilitate your return to current duties, your application may be less likely to succeed. However, if your employer offers you a different role or fewer hours, you may still be able to apply for ill health retirement from your original position.
If your life expectancy is less than one year due to serious illness, you may be able to take the whole of your pension pot as a tax-free lump sum (provided it is a defined contribution scheme). You would need to be under 75 to do this (over age 75 the lump sum will be taxed like ordinary income), and your doctor will need to provide confirmation of your condition.
It isn’t possible to receive your state pension before state pension age, even if you do have poor health or a shortened life expectancy. However, you might be able to receive help with your day-to-day living costs.
If you have a serious physical or mental health condition, check to see if you’re entitled to state benefits such as Statutory Sick Pay, Employment and Support Allowance, or Universal Credit. Each has its own eligibility criteria, and you’ll need copies of the following records to apply:
Depending on your pension scheme, a health condition may entitle you to access your pension early, or even get higher payments and tax credits.
If you have a personal or workplace pension, you can often claim the full lump sum of your pension tax-free if you meet the necessary criteria (see above). With a state pension, you’ll need to wait until you reach state pension age before receiving any benefits.
If you have little or no pension savings, you can explore other state benefits such as Employment and Support Allowance or Council Tax Reduction, which can help with living costs.
The criteria and procedure for each scheme differ. Ask your provider exactly what they need from you. It’s a good idea to enlist the support of an independent financial adviser (IFA). They can guide you through the process, ensuring you know your rights and complete each step accurately.
Steps generally include:
Once your application is submitted (either by you or someone on your behalf) your provider will either award the benefits, request more evidence, or reject your application. The scheme will need to provide detailed reasons for rejection, so that you can appeal if you don’t agree with their reasoning. If you appeal, ensure you do so within the allocated timeframe and remember you may need to provide fresh medical evidence.
You may be able to apply for an enhanced annuity if you suffer from any qualifying health condition, or have done so in the past, or have any lifestyle issues (such as being a smoker) that might shorten your life expectancy. An enhanced annuity (also known as an impaired life annuity) pays you a higher guaranteed income than a regular annuity, since you are considered to have lower than average life expectancy.
A large number of different health conditions and lifestyle factors may qualify you for an enhanced annuity, so even if you believe yourself to be in reasonable health when you retire, it is always worth talking to a financial adviser to see whether or not you may qualify for one.
If your health condition is severe enough that it is preventing you from doing your job, then realistically you may not have a choice about whether or not to retire. However, you can still ask the question, ‘Can I afford to retire early?’ by looking at other areas of your life, to see what economies and savings you would need to make in order to stop work.
Remember, if you draw your pension early, it may have to last longer than it otherwise would. A health condition or disability that stops you from working may not necessarily shorten your lifespan, so you would need to calculate how to make your pension last long enough. The Unbiased Pension Calculator can help you do this. You may also want to look at other sources of income such as remortgaging, equity release and downsizing.
Once you know how much income you can generate from your pensions and other assets, you should have a better idea of the adjustments in your spending that you may need to make.
In the event of permanent ill health, most defined benefit schemes are likely to pay your pension early. Because that means less time for your pension to grow, some may reduce the pension you will get. Check in with your scheme on their specific terms and conditions.
Defined contribution schemes often give you your benefits early in the case of ill health, irrespective of age. You may be given the option to take your benefits as a pension, or a tax-free lump sum, depending on your circumstances. If you are over 75 at the time then your pension will be taxed in the normal way.
It is possible to return to work after you retire from ill health. However, if you have begun to draw your pension early as a consequence of this, then you cannot return to the exact role you retired from, unless you take reduced hours. You can return to a new role, but remember that returning to work will impact your benefits, so read the restrictions carefully.
Both NHS workers and teachers in the UK can claim their pensions before retirement age due to ill health, often without the usual reductions applied to early retirement pensions. Both have their own rules, criteria and restrictions, so do some background reading or ask your employer for their policies. If you have an NHS pension, see how you can make the most of it by getting NHS Pension Advice from a financial adviser.
If you think you may need to retire early due to ill health, talk to an independent financial adviser at the first opportunity.