The imminent change to the rules around when a client can access their pension pot comes at the same time as people are living longer.
From April 2028, individuals will have to wait until they reach the age of 57 to access their tax-free lump sum – the current age is 55.
One of the challenges this could pose, according to Claire Trott, divisional director for retirement at St James Place, is that “the longer a person has to wait to access the pot, the greater the potential for them to become ill and unable to work”.
There is a provision within the law enabling an individual who is no longer able to work to access their pension pot, with guidance provided by HMRC around the conditions that have to be met – this is called an ill-health early retirement.
But while the guidance is explicit, Trott and a range of other industry experts agree that those guidelines are merely minimum requirements, with scheme rules varying and creating potential pitfalls for advisers and their clients seeking to access an ill-health early retirement pension.
FT Adviser recently highlighted a case where an individual who had spent several years as a full-time mother was initially not eligible to access their pension pot early, as the HMRC rules indicate the pension pot can only be accessed early on the basis of replacing income from work, so a client with no income from work is not eligible.
Clare Moffat, pensions expert at Royal London, says if a client does access their pension pot on health grounds and is then not eligible, “this counts as an unauthorised withdrawal and so would incur a tax liability”.
HMRC rules
HMRC’s guidance is explicit, stating that for a pension to be entitled to an ill-health early retirement pension, “they must be either physically or mentally unable to carry out their normal occupation”, but Moffat says the change is that individual schemes may have further rules, such as whether a person could do another job in future.
A registered medical professional must sign the paperwork stating the individual cannot work, and this evidence must be kept by the pension provider for six years after the claim is made.
Trott says one of the issues with the current guidance is that it dates back to 2004, and references a 1978 piece of legislation. She notes this was "a period of time when defined benefit pension schemes were commonplace, and when most people had only one job or career, so it was clear cut if they could not work in that career any longer, but in a defined contribution world, it's different”.
Moffat says a person could have a high-earning but highly stressful job and be found to no longer be able to work at that, but have a substantial pension pot, and then be asked to take another, lower waged but less stressful role.
