Serious ill-health
The serious ill-health condition is only met when a client has been given the clinical prognosis of less than 12 months to live. It can be paid at any age, and where this condition is met then the whole fund can be withdrawn as a lump sum.
Clearly this option is also available under the ill-health condition, or for anyone who has reached NMPA, as under normal benefit rules you can take the whole fund as a UFPLS or take maximum PCLS and withdraw everything under flexi-access drawdown.
However, the big difference is that a serious ill-health lump sum is completely tax-free up to the lifetime allowance when paid before the age of 75. Technically it can be paid after the 75th birthday but it is taxable as income so there is little benefit in accessing the pension in this way over the usual methods.
Where the lifetime allowance is exceeded then the lifetime allowance charge at 55 per cent will be payable on the excess. In practice, the scheme administrator would deduct this before paying the sum to the member.
Two key points to remember about serious ill-health lump sums are that:
- They can only be paid from uncrystallised funds; and
- All funds under that arrangement must be distinguished.
This means that you cannot partially crystallise funds to take a serious ill-health lump sum. Of course, as funds are uncrystallised you could do a partial transfer of the amount you wish to crystallise (or the amount you wish to leave untouched), to separate out the amount you wish to crystallise, and achieve the same result.
Taking a serious ill-health lump sum is probably only going to be the right thing for the client if they have an immediate need for the cash, or at least are not going to exceed the nil rate band for inheritance tax.
Withdrawing the cash from their pension when they are terminally ill is unlikely to be the best option if the money is just going to increase the size of their estate for IHT purposes.
Ill-health to serious ill-health?
It is likely that most clients who have health problems will first think about accessing their pension before they reach the serious-ill health stage.
This could happen at any age, be it accessing pensions early under the ill-health provision, or just those in the late 50s or 60s stopping work whose chances of making it to age 75 are reduced.
Clearly each client’s financial circumstances will be different. For those that have other available assets leaving the pension untouched and therefore outside the estate is the obvious choice.
However, for those less financially fortunate it may be worth crystallising as little as required when taking benefits for the first time. So you could consider either taking UFPLS payments or maximum income under flexi-access drawdown to meet the immediate income needs.
