I’ve just been diagnosed with a terminal illness and may not be around this time next year. I am 59 and have a workplace pension. Can I access these funds or my state pension early? 

Anonymous

Tom Selby, AJ Bell Senior Analyst says:

There are specific HMRC rules which, in certain circumstances, allow people in serious ill health to take their entire pension as a lump sum tax-free. For this to apply, a medical practitioner (e.g. a doctor) must confirm in writing that the individual has less than 12 months to live.

For someone to qualify for a serious ill-health lump sum they must also:

– Have funds that have not been ‘crystallised’ (this just means converted into a retirement income)

– Have available lifetime allowance (the lifetime allowance in 2020/21 is £1,073,100)

– Be in a scheme which allows a serious ill-health lump sum to be taken

If someone meets the criteria and it is a defined benefit (DB) pension they should speak to their scheme administrator to find out their options in the scheme. If it is a defined contribution (DC) scheme they should contact their provider so they can process the case.

It may be sensible to contact the scheme administrator before speaking to the medical practitioner, just to check whether they have any specific requirements which need to be met. For example, some providers ask the medical practitioner to sign a specific form confirming the position.

If someone has a DB pension, has not received confirmation from a medical practitioner that they have less than 12 months to live and has not reached their scheme’s normal pension age they may be able to access their retirement income early, at a reduced rate. Again, they should speak to their administrator to find out if this is the case.

If it is a DC pension, the individual has not received confirmation from a medical practitioner that they have less than 12 months to live, and they are over 55, they have the option of accessing their fund flexibly – either via drawdown or ad-hoc lump sums (provided the scheme they are in facilitates these options).

In these circumstances a quarter of their fund will be available tax-free, while the remaining 75% will be taxed.

If it is a DC pension and the individual’s priority is passing on money to loved ones after they die, they may want to consider leaving the pension untouched.

If they do this and die before age 75 the money can be inherited tax-free, while if they die after 75 it will be taxed in the same way as income when their beneficiary comes to withdraw it. Anyone going down this route needs to make sure their nominations are up to date so any funds left behind are inherited by the right people.

Unfortunately, the state pension cannot be drawn early in any circumstances. However, you may be entitled to other state benefits such as Statutory Sick Pay, Employment and Support Allowance or Universal Credit.

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Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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