How Long-Term Illness Affects Your Pension
Long-term illness can impact your pension in several ways. If you are unable to work, employer and employee contributions stop. Your existing pension pot remains invested, but stops growing from new contributions. The longer the illness lasts, the larger the gap in your retirement savings.
However, there are protections and options available, including ill-health early retirement, NI credits through benefits, and potential early access to your pension.
Can You Access Your Pension Early Due to Ill Health?
In certain circumstances, you may be able to access your pension before the normal minimum pension age:
- Serious ill-health lump sum: If you have a life expectancy of less than 12 months, you can take your entire pension as a lump sum. If you are under 75, this is usually tax-free
- Ill-health early retirement: Some pension schemes allow early access if you are permanently unable to work in your current occupation. The criteria vary by scheme
- Enhanced protection pensions: Some older defined benefit schemes have more generous ill-health provisions
Employer Obligations and Income Protection
Your employer may provide support during illness:
- Statutory Sick Pay: Available for up to 28 weeks if you meet eligibility criteria
- Employer sick pay: Many employers offer enhanced sick pay above the statutory minimum
- Income protection insurance: Some employers provide group income protection that pays a proportion of your salary during long-term illness
- Pension contributions during sick leave: Employer contributions should continue during paid sick leave, based on your normal salary
National Insurance Credits During Illness
Protecting your NI record during illness is important for your State Pension:
- Employment and Support Allowance (ESA): Provides NI credits automatically
- Universal Credit with limited capability for work: Provides NI credits
- Statutory Sick Pay: NI contributions continue through your pay
- Carer's Allowance: If someone is caring for you and claims Carer's Allowance, they receive NI credits
Benefits and Pension Interactions
If you are receiving means-tested benefits during illness, your pension savings may be counted as capital:
- Pension pots before minimum pension age: Generally not counted as capital for benefits purposes
- Accessible pensions (age 55+): May be treated as notional income, even if you are not withdrawing
- Regular pension income: Counted as income for benefits calculations
Getting advice on benefits interactions before making pension decisions is important to avoid accidentally reducing your benefit entitlement.
Steps to Protect Your Pension During Illness
Take these steps to minimise the impact on your retirement:
- Notify your pension provider and employer about your situation
- Check whether your scheme offers ill-health benefits
- Ensure you are receiving NI credits through benefits claims
- Avoid withdrawing from your pension unless absolutely necessary
- Review your expression of wish form and ensure your beneficiaries are up to date
- Consider income protection insurance for the future if you recover