This guide covers:
- What is ill health retirement?
- Who is eligible for ill health retirement?
- How does ill health retirement relate to pension schemes?
- What are HMRC rules on ill health early retirement?
- How does terminal illness impact on ill health retirement pensions?
- What pension payments are made on ill health retirement?
- I want to keep working but my employer doesn’t want me to. What can I do?
- I want to take ill health retirement, where do I start?
- Next steps
You may find that you are eligible for an ill health retirement settlement agreement if your medical condition means that you can’t 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 retirement on medical grounds 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 with your employer if they cannot accommodate your illness in the workplace. We will return to this later, but first, we explain the rules associated with retiring early due to ill health.
What is ill health retirement?
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’. (It’s also sometimes just called ill health retirement). This 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 to agree and sign a settlement document. This is because retirement due to ill health 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 early retirement on medical grounds is not the best way to exit the business if you are unwell. 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 for ill health retirement?
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
How does ill health retirement relate to pension schemes?
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 settlement agreement from your employment, you can get in touch with us and request a phone consultation with one of our specialist 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’t 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 your health 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 the official retirement age.
Pension schemes will require evidence from medical experts of the full picture of your medical 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 retirement due to ill health even if your pension scheme doesn’t.
What are HMRC rules on ill health early retirement?
As you can imagine, Her Majesty’s 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 early 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.
How does terminal illness impact on ill health retirement pensions?
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
What pension payments are made on ill health retirement?
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.
Top TipsAlex Monaco
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 want to keep working but my employer doesn’t want me to. What can I do?
We’re also aware that some employees are forced into early retirement by their employers. You may not yet have 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.
If you find yourself in that situation, then we strongly recommend that you should seek a legal assessment of your case from specialist employment solicitors – like Monaco Solicitors (see below).
You might also want to try our ill health unfair dismissal letter builder if you think you have been unfairly dismissed because of your ill health. This creates a ‘without prejudice’ letter addressed to your employer setting out your legal case for fair compensation.
I 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 an exit package as a settlement, then our specialist solicitors in ill health retirement at Monaco Solicitors may be able to help, so please do get in touch.
If you’re having issues getting answers from the pension scheme itself, then the Pensions Advisory Service are expert in helping individuals who want to retire due to ill health get more information.
If you are having problems deciding what to do about early retirement due to ill health, we may be able to help you.
We are specialist employment law solicitors and have plenty of experience in successfully helping employees in your position to resolve their problems.
If you would like legal advice on what your options are, get in touch with our friendly team and request a consultation: