If you have an illness or disability that’s making it difficult for you to work, you might be thinking about retiring early.
In this scenario, and depending on your personal circumstances, you may be able to access your pension sooner than normal retirement age. However, bear in mind that this is a significant decision with lasting financial consequences, as it could mean that you have a lower pension income for the rest of your life.
Alternatively, your employer may be able to make changes that enable you to continue working, or offer you redundancy pay.
Here’s our guide to help you make this difficult decision, and understand the financial implications of early retirement.
Can my workplace accommodate my illness or disability?
It may be that your particular disability or health condition makes it difficult or impossible for you to continue working in your role. However, if you think there may be ways you could continue working if certain changes were made to your job, then it’s worth speaking to your employer. They cannot legally discriminate against you on the basis of your disability, meaning they cannot fire you or put pressure on you to retire because you’re disabled or unwell.
The law states that employers must make ‘reasonable adjustments’ to accommodate disabled employees. This could include changes to the workplace itself, such as wheelchair ramps, or to the way you work, such as letting you work from home or more flexible hours. If you already work from home, your employer is still obliged to provide certain changes to help you work. Read our article How to get support at home and work if you have a disability for more information, as well as resources to help you get started.
You may also be able to go part-time without leaving your job entirely, and phase your retirement gradually instead of going straight from full-time employment to retirement. Read more in our article How can I phase my retirement?
Can I take my pension early?
You can usually take money from your defined contribution pension when you reach the age of 55, and both men and women have to wait until age 66 to claim their State Pension. However, workplace defined contribution pension schemes generally set a normal retirement age, which is the age employees are expected to start taking their pension benefits. This is often either 60 or 65.
Defined benefit, or final salary pension schemes, typically start paying a retirement income at age 60 or 65 or your State Pension age. However, if you need to retire early then you may want to access your pension before your scheme’s normal retirement age.
Some pension schemes will allow you to withdraw money early on the basis of ill health or disability. This is known as being ‘medically retired’.
Bear in mind that different schemes use different definitions of illness and disability. Some might state that your condition needs to prevent you from doing any kind of work at all, not just your current role, in order for you to qualify.
Also remember that taking your pension early has financial implications. You will lose out on future investment gains if the money had remained invested in a defined contribution pension. Also, bear in mind that you can take 25% of your pension tax-free at 55, but the rest will be subject to income tax, so be careful about how much you choose to withdraw. Read our articles Should I take my tax-free pension cash at 55? and How can I manage the financial impact of early retirement? for more information.
You may also receive a lower pension than you would otherwise be entitled to if you’re accessing a defined benefit, or final salary scheme early. This leaves you with less money over the course of your retirement, unless your employer offers an enhanced early retirement package by paying your pension as if you’d worked until the normal pension age.
If you’re terminally ill, with a life expectancy of less than one year, you may be able to take your entire pension pot as a tax-free lump sum, provided you’re under 75 and your doctor can provide confirmation of your condition.
It’s really important to speak to an advisor or pensions expert if you need help weighing up your options.
If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
Should I get an annuity?
If you are retiring early due to ill health or a disability, you may want to consider using some or all of your pension to buy an annuity, which would provide you with an income for a set amount of time (a ‘fixed term annuity’) or until you die (a ‘lifetime annuity’).
If your illness or disability has an effect on your life expectancy then providers may offer you an ‘impaired life annuity’, which will provide you with a higher yearly income than normal. You’ll usually need to complete a medical questionnaire in order to qualify, and some providers may require your medical records, or for you to undergo an examination. Read more about annuities in our article Annuities explained.
What about voluntary redundancy?
Your employer might offer you the option of voluntary redundancy, which could provide some extra income before you need to access your pension or other savings.
However, the amount of redundancy pay you can get will vary. The minimum amount you are entitled to – statutory redundancy pay – is calculated by multiplying your average weekly pay by 1.5, and then multiplying that figure by the number of years you’ve worked at your job. However, weekly pay for these purposes is currently capped at £643, and you can only factor in a maximum of 20 years of service at your job, so the upper limit on statutory redundancy sits at £19,290 in 2023/24.
Alternatively, your contract may name a specific amount of redundancy pay that you’re entitled to, which legally must be at least the statutory amount.
Make sure to draw up a budget to figure out how long an income from your redundancy pay will support you for. Read more in our article How to make the most of your redundancy pay.
What benefits am I eligible for if I’m ill or disabled?
Remember that your illness or disability may also entitle you to certain government benefits.
The Personal Independence Payment (PIP) was introduced in 2013 for people aged between 16 and the State Pension age for people who need additional care or mobility assistance. Your eligibility for PIP has nothing to do with whether you can work and is not tested against your income or National Insurance contributions – it specifically exists to help you with the extra costs of your condition. Read more in our article Personal Independence Payment explained.
For other benefits that you may be eligible for, such as Statutory Sick Pay, Universal Credit and Employment and Support Allowance, read our article Benefits if you have a health issue or disability.
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