Ill Health & Early Retirement

Ill Health & Early Retirement

Ill Health may make it impossible for you to continue working. If this is the case, it may be possible for you to access your pension benefits early to provide you with an income to support you while you are ill. However, this may not be the best solution for you. It is also possible that you may have cover in place, provided by your scheme, your employer or yourself, to enable you to maintain a reasonable income in the event of ill health.

What are the grounds for taking Ill Health Early Retirement

You may be able to take early retirement on grounds of ill health if you suffer from physical or mental deterioration which is bad enough to prevent you from following your normal employment or which very seriously impairs your earning capacity. It should note that a minor decline in energy or ability is not adequate to justify early retirement on the grounds of ill health.

If you are in ill-health, there is no obligation on you to take early retirement, i.e. to take benefits from your pension scheme now. Depending on your circumstances, there may be good reasons to do so or not to do so. The potential advantages and disadvantages of ill-health early retirement are listed below.

Advantages of taking Ill Health Early Retirement

It may be advantageous to take ill-health early retirement if you are a member of a defined benefit scheme.

  • This allows you take the full benefit that you would have been entitled to at normal retirement age. You should note that not all defined benefit schemes have terms this generous – but where they do exist it may make sense to take advantage of them.
  • You may have a particular need for income now which takes priority over your need for a potentially higher income in the future

Disadvantages Of Taking Ill Health Benefits Early

The Disadvantages of Taking Ill Health Benefits Early are as follows;

  • For or a defined contribution pension scheme member, a PRSA or a personal pension plan holder, the annual income you can receive from your pension will be lower if taken at an earlier age than if taken at normal retirement age.
  • The rules of some pension schemes may not permit early retirement on grounds of ill health
  • If you or your employer has taken out a Personal Health Insurance Policy for your benefit then it may make more sense to rely on benefits from this rather than to draw on your pension early. Drawing your pension while in receipt of PHI may result in a higher tax bill.

What are the Terms/Conditions of taking ill health early retirement

The terms of ill health early retirement will to a considerable degree depend on the type of pension scheme you are in and the rules of your scheme. Below are your options under the most common types of pension schemes are discussed below.

Defined Benefit Pension Schemes

Your scheme rules may allow for you to receive the same benefit that you could have expected to receive if you had worked until normal retirement age at the same salary. Alternatively, your scheme may provide Permanent Health Insurance (PHI) enabling continuation of an income and pension contributions for you until either you recover or you reach normal retirement age.

You should note that some schemes do not provide either of these benefits. If this is the case, and if you desperately need income from your pension, it may be possible to take voluntary early retirement, or to transfer your benefits away from the scheme to a new pension structure that allows for ill health early retirement such as a PRSA. This last course may come at a high cost since, if your scheme is under-funded, a penalty may be applied to transfers out.

Defined Contributions Pension Schemes

Your scheme or employer may provide PHI cover which, in the event of ill-health, will continue to provide you with an income and will make pension contributions for you until either you recover or you reach normal retirement age.

Failing this, provided that the rules of the scheme allow, you should be able to take retirement benefits early on the grounds of ill health. However, the amount you receive will be lower than if you had continued as a member until normal retirement age. This is because

  • You and your employer will have contributed less.
  • The fund will not have had as long to grow
  • The benefits may have to last you for longer.

PRSAs

If you become permanently unable to work due to ill health, and can produce supporting medical evidence, you will be able to draw the benefits from your PRSA no matter how young you are. However, the amount you receive will be lower than if you had continued contributing to your PRSA until normal retirement age. This is because;

  • You and your employer will have contributed less.
  • The fund will not have had as long to grow
  • The benefits may have to last you for longer.

Personal Pensions

If you become permanently unable to work due to ill health, and you apply for and get Revenue approval, you will be able to draw the benefits from your personal pension before age 60. However, the amount you receive will be lower than if you had continued contributing to your Personal Pension until normal retirement age, again because

  • You and your employer will have contributed less.
  • The fund will not have had as long to grow
  • The benefits may have to last you for longer.

Occupational Pension Schemes

Serious Ill Health is defined for pension purposes as a life expectancy measuring months rather than years due to severe medical circumstances (usually less than one year).

In the event of serious ill health, if you are a member of an occupational pension scheme it may be possible for your pension benefits to be paid to you as a single lump sum. A portion of the lump sum payable may be subject to income tax at a special 10% rate. The ability to use this facility may depend on the rules of your pension scheme and the discretion of the trustees

Looking For advice in relation to any of these options

If you are looking for advice in relation to any of these options, we strongly recommend that you speak to one of trusted pension advisors. You can contact us via email at hello@pension-advice.ie or by phone on 01 912 5030.

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