It is also worth noting that, unlike with some protected pension ages, there is no reduction in the lifetime allowance available due to taking benefits earlier.
It is also possible for benefits taken early under ill-health to stop if the member recovers and returns to work. This would be unusual as to meet the criteria at outset they have to have been deemed medically incapable of working on a continuing basis. However the rules do allow for recovery and recognise that the prognosis can change.
Under these circumstances the recovery does not make the benefits already taken unauthorised, so no penalty will apply provided the condition was met at the time benefits were first paid out. Neither does recovery itself mean benefits must cease – although some scheme rules may – as the test is a one-off at the time benefits are crystallised.
It is worth noting though that taking any income under flexi-access drawdown or taking an UFPLS will trigger the money purchase annual allowance so the ability to rebuild funds on returning to work will be reduced.
Transfers
One area where you do need to be careful with those in receipt of ill-health pensions is on transfer.
Take the example of a client who is unable to continue in their current full-time, high-stress occupation at the advice of their doctor. However after a break to recuperate, they want to do something completely different and move to a more relaxed, part-time job in a different field.
In these circumstances they may want to access some of their pension (especially if they have substantial savings) to top up their significantly reduced income.
Provided their pension scheme rules allow the maximum flexibility, meaning they can access benefits when they stop their original occupation, then they can take early ill-health pension. If they later start work in their new occupation then that pension can continue.
If you decide with the client that it is appropriate to transfer the pension to a new provider, for whatever reason, then you need to be careful with the timing.
If a transfer is carried out before the client stops their original occupation, or when the client is not working at all, then the ill-health condition will be satisfied (assuming appropriate medical evidence is provided). If you transfer once the new occupation has begun, then the client will no longer qualify under the ill-health rules as at the point they join the new scheme that new occupation becomes the occupation that they have to be incapable of carrying out.
