Early Retirement Due to Ill Health
You may find that you are eligible for early retirement due to poor health if your medical condition means that you can not continue your work. We’ll help explain the rules of ill health early retirement in the UK so you can better understand your own situation and options.
Bear in mind that even if you’re not eligible for ill health retirement or it is not viable for you (e.g. due to no or limited pension entitlements) you may still be able to negotiate an exit package or settlement agreement with your employer if your employer cannot accommodate your illness in the workplace. We will we return to this later, but first we explain the rules associated with retiring early due to ill health.
What is it
Firstly, it’s important to point out that the official name which you may come across is ‘early retirement due to ill health’, or ‘ERDIH’. Ill health retirement, or early retirement due to ill health, is when you leave your job before you reach official retirement age, due to a health condition or sickness.
When an employee takes early retirement, either due to ill health, or for any other reason, it is not usual for their employer to ask them sign a settlement agreement (also still sometimes referred to as a compromise agreement). This is because ill health retirement is something the employee must request. Before requesting ill health retirement you should be aware of what other options are available to you.
It may be that ill health retirement is not the best way to exit the business if you are unwell and you may be able to get a better outcome by negotiating an exit with your employer. If you are receiving income protection insurance sometimes the insurer will agree to pay a lump sum payment which would not impact your pension entitlements. A specialist employment solicitor who works to represent employees can assist you with determining what is the best course of action for you.
Who is eligible
The details for who can retire early due to ill health are laid out in two sets of important rules relating to this area. They are the rules outlined by:
- Your employer’s pension scheme.
- HM Revenue and Customs.
We go into further details about these criteria below.
Your pension scheme
Regardless of the exact age you’d like to take ill health retirement, you will have to fit into the rules outlined in your employer’s pension scheme.
The rules of various pension schemes may vary between providers, so it is important to check the details related to your own pension scheme. You can do this by making an enquiry with your employer’s HR department, or by contacting the pension provider directly, making sure to have your policy number to hand.
If you are having any issues understanding the policy, and think that you have grounds to take ill health retirement or an exit package settlement agreement from your employment, you can request a free phone consultation with one of our senior employment solicitors.
Some of the rules that you are likely to find within your pension scheme policy include:
- Lack of capability for any job:
It may be a rule found in your pension scheme that you need to show that you are not only unable to continue doing your own job, but unable to do any job within the company due to your ill health/medical condition. This is a rule found in some pension schemes so it’s important to find out if it is included in your particular policy. If it’s included it will involve you having to gather the proof that you can not do any alternative job within the company, which is going to be a more difficult task than arguing that you are unfit only to continue in your current role.
- Clear evidence of condition:
It is very likely that you will need clear evidence that you are not fit to work, and that you will not become fit to return to work before you reach official retirement age. Pension schemes will require evidence from medical experts of the full picture of your condition, and some schemes may request that this be provided from an objective medical practitioner who is not your own GP. It may also have to be shown that you have attempted various treatment methods to improve your condition.
Ensuring that doctors produce the most effective evidence for your application can be a difficult task. Doctors aren’t lawyers and don’t always tailor the information they provide to the requirements of the Pension Scheme. At Monaco solicitors we are experienced in liaising with doctors to ensure that the information they provide gives your application the best chance of success.
Remember, there is a chance your employer may dispute your claim for ill health retirement even if your pension scheme doesn’t.
As you can imagine, HM Revenue and Customs have a lot of their own conditions which need to be met in order for them to agree that you are eligible for early retirement due to ill health. Individuals who are looking to retire due to ill health before the age of 55 may be required to pay a higher rate of tax.
It’s important to make sure you meet HMRC’s conditions, as if you take ill health retirement without doing so, you will find yourself with a hefty tax bill when you take your pension before the age of 55.
As it states on the HMRC’s website:
“Some companies offer to help you get money out of your pension before you’re 55. This could be an unauthorised payment. If it’s unauthorised, you pay up to 55% tax on it.”
The HMRC’s conditions are as follows:
- You must have left your job and no longer be working;
- You must be incapable of continuing to carry out your job due to physical or mental illness;
- You must continue to be assessed as incapable of doing your job due to your aforementioned ill health until you reach your normal expected retirement age. In other words, it may not be taken for granted that although you may have been incapable of doing your job at 55, you are still in enough ill health to do your job at 60. Your pension scheme provider will have a medical professional confirm this lack of capability.
Terminal Illness and ill health retirement
If you have less than a year to live, you may be able to apply for your whole pension to be paid as a lump sum. This is possible if the following criteria, taken directly from HMRC’s website, apply to you:
- you’re expected to live less than a year because of serious illness
- you’re under 75 (if you’re over 75 you pay 45% tax on the lump sum)
- you don’t have more than the lifetime allowance of £1 million in pension savings
Pension payments – How much will you receive?
Again, the pension payments that you will receive if you successfully take early retirement due to ill health are dependant on your pension provider and the particular scheme that you are subscribed to by your employer.
The initial part of the pension should be paid in a tax-free lump sum, as if you had retired at the normal retirement age. Your pension scheme will be one of the following:
- Salary-related Pension Scheme (also known as a defined benefit or final salary scheme)
The payments you receive will be based on your salary you’re earning at the time that you take your retirement. The payments will be paid at the same rate as if you had taken retirement at the normal time.
- Defined Contribution Scheme (also known as a ‘money purchase’ pension)
With this type of pension you can take money directly out of the fund, or convert your pension into an income for life.
In some cases, if you have a defined contribution scheme, and want to convert your pension into an income for life, you may be able to receive higher payments if you have retired due to ill health. Check your pension scheme to see if this applies to you.
“I want to keep working but my employer doesn’t want me to!”
We’re also aware that some employees are forced into early retirement by their employers. If you have not yet reached retirement age and feel that your employer is trying to push you into early retirement on unfair grounds, or discriminating against you based on your age, then we can access the strength of your case. Being forced to retire, whether you are ill or not may also considered to be age discrimination in some particular cases. Our team is expertly placed to hear your story and advise on the best course of action.
- Seek legal advice to ensure ill health retirement is the best option for you.
- Ensure your medical evidence meets all the requirements of your pension scheme
- Ensure you meet HMRC criteria as well as your pension schemes
“I definitely want to take ill health retirement, where do I start?”
You will need to contact the administrator of your pension scheme if you want to retire early due to ill health. If you feel that your employer may owe you a settlement agreement or exit package then this is where Monaco Solicitors may be able to help.
If you’re having issues getting answers from the pension scheme itself, then the Pensions Advisory Service are experts in helping individuals who want to retire due to ill health get more information.
How we can help…
Our solicitors are senior employment law practitioners and will be able to advise you on whether ill health retirement is right option for you or if you have a better case for achieving a settlement agreement from your employer when you take ill health retirement. If your employer is disputing your ill health retirement we may be able to help. Request a free phone consultation with one of our senior team to find out more.
If you are struggling at work due to sickness or find you are unable to continue in your job because of ill health, you may have grounds to exit your employment with an ex gratia payment or exit package even if you can not take early retirement and start receiving your pension. Your employer may have offered you voluntary redundancy as an alternative but it’s important to get independent advice on what course of action would eventuate in the best outcome for yourself (and your bank balance). You might also want to read our related article which looks at the question ‘Is my redundancy fair?‘.