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Ill health

Personal ill-health

Falling ill, and being unable to work, could have a serious effect on the value of your retirement benefits.

If you fall ill, and are unable to work, you may not be able to afford to continue to make pension contributions. This could have a significant effect on the value of your future retirement benefits.

If you’re a member of a workplace defined contribution pension scheme and your employer continues to pay you when you’re ill, they will also continue to pay their contributions into your pension scheme. They will also deduct your contributions from your pay and pay these into the scheme. However, if pay reduces, or they stop paying you, after a certain amount of time, then the amounts paid into your pension will reduce, or stop.

If you’re a member of a defined benefits pension scheme, you will continue to build up pension benefits whilst you are being paid, but, if you pay reduces, you will build up pension benefits at a slower rate. If your employer stops paying you, you will stop building up pension benefits.

If you have a personal pension, self-invested personal pension (SIPP) or stakeholder pension (SHP) scheme, you may not be able to afford to continue paying contributions at the same rate, whether you’re employed or self-employed. If you reduce your contributions, your pension pot will grow at a slower rate and, therefore, provide lower retirement benefits when you decide to start drawing them. It is possible to insure some or all of the contributions that you pay to the scheme using pension contributions insurance (PCI). This is a form of income protection policy offered by some insurance companies. Before taking out a PCI policy, you should check the terms and conditions of the policy very carefully to check that it meets your needs. There may be limits on the amount that the policy will pay out and/ or the amount of any payments on which you’ll receive tax relief. You could also use an income protection policy to cover some or all of your pension contributions.

Serious ill-health

If you are seriously ill, and it’s unlikely that you’ll be able to work again, you may be able to draw your pension benefits early, regardless of your age. You should speak to your scheme administrator or pension provider to see if this is possible. If you do draw your benefits early, they are likely to be lower than the benefits you would have received if you had continued working until your expected retirement date.

In extreme cases, where your life expectancy is expected to be less than one year, the scheme’s rules may allow you to take the whole value of your retirement benefits as a tax-free cash lump sum.

 

State Pension and ill health

The level of State Pension that you will receive from State Pension age could also be affected if you are unable to pay National Insurance contributions (NICs)and do not receive NIC credits. If you receive State benefits whilst you are ill, you should check that you are also receiving NIC credits.

 

Frequently asked...

Where can I find out more?

If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.

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