Martin Jones: Adviser role crucial when accessing pensions in ill-health

Martin Jones looks at the pension ill-health rules and why independent financial advisers have an important role to play…

With health concerns at the forefront of many people’s minds right now, and with traditional income sources at risk in a way not seen for the best part of a decade, many clients may be looking to their savings and investments in order to plug shortfalls.

For those in ill-health, their pension could assist, as pension rules allow members to access their pension before the age of 55 if health reasons mean they are unable to continue working.

While the rules in this area look relatively straightforward, they warrant further investigation as there are a couple of pitfalls to trap the unwary. But with a bit of knowledge, a good adviser can play a crucial role.

Requirements

When it comes to ill-health, the requirements break down into three elements – the past, the present and the future.

  • Past – The member must have stopped performing their occupation due to ill-health
  • Present – The member must be incapable of performing their occupation due to ill-health
  • Future – The member must continue to be incapable of performing their occupation due to ill-health

The first is a question of fact. It’s between the scheme administrator and the member as to how they evidence that point. Be prepared for different administrators to approach this in different ways.

The second and third are a question of opinion, that being the opinion of a qualified medical practitioner.

Ill-health in this context can be physical or mental, and it includes injury, sickness, disease and disability.

Current occupation

Clearly, in those requirements the term ‘occupation’ is important, and it’s worth advisers being aware of what this might mean in practice.

For example, if a client was a lawyer when they joined the scheme, but then a few years later developed a serious illness meaning they could no longer continue working in any occupation let alone as a lawyer, it’s unlikely HM Revenue & Customs (HMRC) would challenge early access to the pension benefits.

However, it becomes more complicated where a member is unable to perform their main occupation due to ill-health but is able to perform a different type of occupation.

It may depend on the scheme rules – some are stricter than others – but if a client was a professional sportsperson when they joined the scheme, for example, and suffered a career-ending injury, then even if they later found a new occupation they may still be able to access their pension early.

Another ‘change of occupation’ scenario that sometimes crops up is where a client has formerly had an important role in a business, perhaps at director or senior manager level.

The client can no longer function at that same level due to ongoing ill-health, but they want to remain involved, and the business values their experience and expertise, so they are working in a reduced capacity.

Given they are still performing a similar role, there is a chance that HMRC could view this as still performing the same occupation. A client in this situation may need to consider cutting ties completely.

It can also be challenging where a member has no occupation at all when they join the scheme.

Here, an example scenario might be that of a client who has a chronic condition, due to which they have stopped working. They are now looking to consolidate several pensions into one in order to start taking benefits.

In a situation where there is no current occupation, the expectation from HMRC is that the scheme administrator establishes what the occupation is that is most appropriate to the member.

In practice, this is often quite straightforward to figure out from a client’s work history, but you may need to prepare the client to answer a few questions from the scheme administrator while they establish this.

Advice

There is no requirement for members to notify HMRC in any way. However, pension scheme administrators are required to notify HMRC of all instances of members taking benefits early due to ill-health.

This means that HMRC has a much higher level of visibility with ill-health benefits than it does with other payments or transactions, and it would be relatively straightforward for HMRC to investigate those cases if it felt so inclined.

Also, if a scheme administrator allowed a member to access their pension before age 55, and they were unable to demonstrate the member met the ill-health requirements, HMRC would likely view it as an unauthorised payment, which would give rise to sizeable tax charges for the member.

What this means is that scheme administrators may view ill-health benefits as a high-risk area and maybe extra careful when dealing with these cases.

This clearly presents challenges for an adviser who, on one hand, has a client in ill-health they need to look out for and, on the other hand, has a well-intentioned but cautious scheme administrator.

But with a bit of knowledge of the rules and the ability to see things from both sides, an adviser can play a crucial role in getting a good outcome for a client in need of support.

Martin Jones is technical team leader at AJ Bell