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.
Grounds for taking ill health early retirement benefits
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.
You should note that a minor decline in energy or ability is not adequate to justify early retirement on the grounds of ill health.
The pros and cons of taking ill-health early retirement
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.
Reasons for taking ill-health early retirement benefits
- It may be advantageous to take ill-health early retirement if you are a member of a defined benefit scheme which allows you to 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 at your normal retirement age
Potential Disadvantages of taking ill-health early retirement benefits
- Typically for a defined contribution pension scheme, a PRSA or a personal pension, 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 in tandem may result in a higher tax bill.
Terms of 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. 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 Contribution 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 i) you and your employer will have contributed less, ii) the fund will not have had as long to grow and iii) the benefits may have to last you for longer.
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 because i) you will have contributed less, ii) the fund will not have had as long to grow and iii) the benefits may have to last you for longer.
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 i) you will have contributed less, ii) the fund will not have had as long to grow and iii) the benefits may have to last you for longer.
Serious Ill Health and 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.
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.