Understanding pensions and ill-health
Up to 30 CPD minutes
Introduction
The ability to take benefits early on ill-health can be a lifeline to some clients. As well as knowing the options available and the taxation of the benefits taken, it’s important that advisers are also aware of the potential pitfalls in taking benefits on ill-health – particularly when considering a serious ill-health lump sum.
This module should take around 30 minutes to complete. It includes a short self-assessment quiz to test what you’ve learned. A 30 minutes CII/PFS accredited CPD certificate can be claimed.
This module should take around 30 minutes to complete. It includes a short self-assessment quiz to test what you’ve learned. A 30 minutes CII/PFS accredited CPD certificate can be claimed.
Outcomes
On completion of this module you should be able to:
- Explain when clients can take pension benefits on ill-health and the options available
- List the conditions that have to be met to allow a serious ill-health lump sum
- Describe the tax treatment of pensions taken on ill-health
Learning material
This module looks at the options and rules around taking pension benefits on ill-health or serious ill-health, plus the taxation of the benefits.
Please read the learning material before attempting the self-assessment questions.
CPD minutes: up to 30
Technical guide – Pensions and ill-healthOpens in new windowPlease read the learning material before attempting the self-assessment questions.
CPD minutes: up to 30
Post learning assessment
Question 1
Which of the following statements in regard to taking pension benefits on ill-health is FALSE?
a. The individual is incapable of carrying out their occupation and has actually stopped working
b. All benefits under the arrangement must be crystallised at the same time
c. If an annuity is to be purchased, better rates may be available via an 'impaired life' or 'enhanced' annuity
d. For pensions paid early from defined benefit schemes, the scheme rules will determine how the benefits are calculated
a. The individual is incapable of carrying out their occupation and has actually stopped working
b. All benefits under the arrangement must be crystallised at the same time
c. If an annuity is to be purchased, better rates may be available via an 'impaired life' or 'enhanced' annuity
d. For pensions paid early from defined benefit schemes, the scheme rules will determine how the benefits are calculated
Question 2
James has been diagnosed with terminal cancer and is considering his pension options. Which of the following is NOT a condition for James to be able to take a serious ill-health lump sum from his SIPP?
a. A registered medical practitioner has confirmed that his life expectancy is less than 12 months
b. The SIPP funds being paid as a serious ill-health lump sum are uncrystallised
c. James has enough available lump sum and death benefit allowance (LSDBA) to cover the serious ill-health lump sum
d. The lump sum extinguishes all uncrystallised rights under the arrangement
a. A registered medical practitioner has confirmed that his life expectancy is less than 12 months
b. The SIPP funds being paid as a serious ill-health lump sum are uncrystallised
c. James has enough available lump sum and death benefit allowance (LSDBA) to cover the serious ill-health lump sum
d. The lump sum extinguishes all uncrystallised rights under the arrangement
Question 3
With regard to taxation, which of the following statements is FALSE?
a, If benefits are taken on ill-health grounds, a tax free lump sum of 25% is generally available
b. Benefits taken on ill-health grounds will be free of income tax
c. Serious-ill health lump sums are paid tax free but may be subject to IHT when the member dies
d. Transferring the pension benefits of someone in poor health can have IHT implications if they die within two years
a, If benefits are taken on ill-health grounds, a tax free lump sum of 25% is generally available
b. Benefits taken on ill-health grounds will be free of income tax
c. Serious-ill health lump sums are paid tax free but may be subject to IHT when the member dies
d. Transferring the pension benefits of someone in poor health can have IHT implications if they die within two years
Check your answers
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Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.