Terminal Illness and Pensions
If you have a terminal illness, then you need to consider your pension very carefully. If your consultant or GP will confirm in writing that you have less than 12 months to live, then legislation allows pensions you have not yet taken to be paid as a tax-free lump sum. If you have longer than 12 months, you might want to consider waiting to take all of your pension.
Please note however, once the money comes out of the pension it will form part of your estate, and be potentially liable to inheritance tax. If the sums are large then it might make sense not to do it all, as most pensions are in trust.
If you have a final salary scheme, then the rules of the scheme take precedence. If you are diagnosed as terminally ill some schemes offer an accelerated payment of the first five years of income and lump sum, and some have no ability or facility to take any benefits.
If you have a final salary scheme which you have not taken, and are terminally ill then you may have a more unusual option that might work. The scheme will have its own rules as to what it can offer, and you'd normally be tied to that.
However, there is potentially another option. It is often possible to ask the scheme for a transfer value. They will calculate what the value of the pension is for someone with normal life expectancy.
An example will explain this:
Option 1: Taking scheme benefits from the final salary scheme
The scheme allows him to take his pension, and will pay him the £3,000 until he dies (with a five year guarantee), and then the income will half for Mrs Osbourne. It is a fully inflation proofed income. So, £3,000 of taxable income will be paid for five years, dropping down to £1,500 per year of taxable income for Mrs Osbourne.
Option 2: Using personal pension legislation
The larger the pension, and the nearer to retirement age you are the bigger the transfer value.
The key point is that the final salary scheme will not necessarily tell you that a transfer value might be better than what they can offer (if indeed it can offer anything immediately).
If you can't find the information you're looking for on the website, or you want to know more or have a question, or just want to chat through some details about your pension then please feel free to contact us, without obligation. Either contact us online or call 0800 011 2713.