What is ill-health early retirement?
Requesting early retirement on ill-health grounds is a stressful situation for members, particularly as requests are often rejected and the member doesn’t understand why.
Rejected requests form the basis of many complaints with which TPAS or the Pensions Ombudsman get involved.
Here we will look at some of the common questions.
What is ill-health retirement?
Legislation requires the scheme administrator to have qualified medical evidence that the member is not only unable to carry out their current occupation (either physically or mentally), but also that they will not be capable of returning to that occupation at a future date. This could be due to injury, sickness, disease or disability.Ill-health pensions may be paid at any time, including before age 55.
For members of defined benefit schemes, normally the pension is not reduced for early payment, and it may possibly be enhanced, for example by basing the amount on prospective pensionable service up to the member’s normal retirement date.
The rules will define what ill-health means to the particular scheme but it normally means that a member is permanently incapacitated and no longer able to carry out duties due to physical or mental illness.
Some scheme rules will refer to any job, not just the member’s job.For members with DC benefits who use them to purchase an annuity, they may be entitled to better rates with an enhanced or impaired life annuity.
Ill-health pensions or annuities with enhanced rates are often subject to periodic review to ensure continued eligibility.
Is serious ill-health different?
Yes.
HMRC defines serious ill-health as having a life expectancy of less than 1 year. Due to this short period, all the member’s benefits in excess of any GMP can be exchanged for a cash sum which is tax free.
The member should not have used up all of their lifetime allowance at the point payment is made. Any payment made that exceeds the available lifetime allowance creates a chargeable amount at the rate of 55%. This chargeable amount is normally deducted by the scheme administrator before paying the serious ill-health lump sum, so the member receives the net amount.
If the member is married or has a civil partner at the point of crystallisation then 50% of the benefits relating to contracted-out rights must be retained by the scheme to provide a survivor’s pension.
What medical evidence is required?
The member must provide a report from their own doctor. In addition, the trustees will require a further report from an independent medical examiner and they will normally meet the cost for this.
Information will include a prognosis in relation to the impact on their ability to work both now and in the future i.e. are they likely to remain unfit for work or could improvements in their condition be expected so they could resume some or all duties.
The independent examiner may come to a different conclusion to the member’s doctor.
Medical information is complicated but the trustees need to know whether or not there is reasonable medial evidence to conclude that the health problem is likely to be permanent or cause permanent or temporary impairment in the member’s ability to carry out his/her job.
The evidence may suggest that although the current role cannot be performed, the member is capable of carrying out other work. In this case the trustees may look to find the member an alternative role.
What do the trustees consider?
In order to carry out their duties fully and avoid a complaint being upheld, the trustees must be able to prove that:
Above all, the trustees must reach a decision that is not perverse i.e. one which other decision makers, with the same evidence, would make.If there is uncertainty over whether a member may be able to work in future, the trustees must make their decision on the balance of probabilities.
For example – a person may require an operation but it’s not known if it will help improve the condition. A decision on the probability of the operation being successful should be made at the time but alternatively, the trustees may defer a decision and advise the member that on current evidence the incapacity does not appear to be permanent but they are willing to wait until after the operation to find out.
Trustees also have the ability to award early retirement benefits temporarily enabling them to re-assess a member’s medical condition and ability to obtain gainful employment, at a later date.
What benefits are payable?
For members of defined benefit schemes, the benefits are normally either:
The above provisions are expensive to provide and a member could be receiving them for many, many years. Consequently, the rules that allow ill-health early retirement have strictly defined terms.
For members of defined contribution schemes the situation is much simpler. The rules will still define the conditions under which a member can apply to take their benefits before age 55 for ill-health reasons but generally there is no additional cost to the scheme. The benefits are still based on the value of the member’s fund and, if an annuity is to be purchased, their age at the date of the purchase. The difference is that a member may be able to obtain enhanced or impaired life annuity rates which provide a higher amount of pension than those for a healthy person at the same age.
Do I need to be on sick leave to apply for ill-health retirement?
No, a member does not normally have to be on sick leave when making an application.
How are spouse’s benefits affected?
If the member is in a defined benefit scheme, the spouse’s benefits payable on the death of the member are not affected by ill-health early retirement.
If retirement is on serious ill-health grounds, a survivor’s pension will be payable in respect of contracted-out rights only.
For members of defined contribution schemes, it will depend on how the member has accessed the benefits.
What happens if the application is not successful?
If a member’s application is not successful, they can go through the scheme’s internal dispute resolution procedure (IDRP). Information regarding what to do will be in the scheme booklet, but members would normally have to write to a specific person and include all relevant facts and evidence.The member can contact TPAS during the IDRP process or afterwards if their application has not been successful, and ask TPAS to investigate their case.
After going through the above, if the member is still not happy with the decision, the case can go to the Pensions Ombudsman. The member must contact TPAS before going to the Pensions Ombudsman. The ombudsman’s decision is final and binding to the extent that it is correct in law.
If the Pension Ombudsman’s decision is in their favour, the benefits will be paid to the member in accordance with the ill-health provisions and possibly backdated.
If the Pensions Ombudsman upholds the trustees’ decision to reject the claim, the member will not be allowed to receive the ill-health benefits. The member will then need to decide if they want, or can afford, to retire early on the normal benefit basis. If they are under age 55, they will need to wait until they reach that age before applying for early retirement on normal grounds.
What is a PHI scheme?
Some employers provide permanent health insurance (PHI) cover. This is not a pension scheme benefit but is closely related to pension scheme membership.
If the member is covered by PHI, they may be able to receive income until NRA, when PHI ceases as the scheme pension becomes payable. The PHI cover is provided by an insurance company and the amount of income depends on what the employer has selected under the policy but it will not be the same as the member’s salary.
For example, PHI could be up to 75% of the member’s salary less the Statutory Sick Pay.
Some PHI policies will also cover pension contributions whilst the member is off sick.
Medical evidence is also required for PHI claims and if the claim is agreed, the evidence will be reviewed, normally annually by the insurer. If the member is showing improvement in their condition, the cover may cease or be reduced, so it is not guaranteed to be paid continually to NRA.
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