NHS Pension Scheme members in very serious ill-health may be able to swap their pensions for a lump sum payment on retirement.
It may not be a palatable topic to think about, but it’s important to know how your retirement finances would be affected if you developed very serious ill-health. For doctors and other members of the NHS Pension Scheme, this means understanding how the scheme’s terminal illness benefits work and the ill-health retirement criteria.
What qualifies for ill-health retirement?
To qualify for ill-health insurance have at least two years of membership and be permanently incapable of carrying out your role because of injury or ill-health.
What happens to your NHS pension if you’re terminally ill?
The basic principle is that a member taking early retirement on medical grounds, who is not expected to live longer than a year, is usually entitled to exchange all their NHS ill-health benefits for a one-off lump sum payment. This cash is usually tax-free and the payment can be taken without affecting the benefits to which the member’s dependants are entitled; these will be paid as normal.
What you’re doing here is swapping your ill-health NHS pension income for upfront cash, so how much you’re entitled to depends on the value of your NHS ill-health pension. It’s worth noting that members over their normal pension age aren’t entitled to enhanced ill-health benefits from the NHS Pension Scheme, however, they do have the option to exchange their retirement benefits for a one off lump sum payment where life expectancy is less than 12 months. Also, to take advantage of the cash lump sum option, you must have at least some lifetime allowance remaining under HM Revenue & Customs’ rules governing how much pension benefit you can build up tax-free.
NHS ill health retirement lump sum payments
Those caveats aside, the NHS Pension Scheme uses a formula, set in accordance with HMRC rules, to calculate lump sum payments to members with a terminal ill-health.
First, the scheme considers the maximum tax-free cash you would normally be entitled to take at retirement, this is usually 25% of your fund value for defined contribution schemes but as the NHS is a Defined Benefit Scheme there is an agreed factor used for the maximum tax-free cash. The NHS will first convert taxable pension income into a tax-free lump sum at the value of £12 for every £1 of income given up to the maximum allowable under HMRC rules. The remaining pension is then converted into a lump sum at the rate of £5 for each £1 of pension foregone.
Finally, any basic retirement lump sum you’re due from either the 1995 Section of the NHS Pension Scheme or the 2008 Section is added to the total.
If you decide this is the right option for you, it’s important to note that you must apply for this conversion before your NHS pension is paid – and you can’t change your mind once you have received your lump sum payment. Also, members in various groups are treated slightly differently:
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Members with deferred NHS Pension Scheme benefits:
if you’re a deferred scheme member – someone who is no longer contributing to the NHS Pension Scheme – the standard arrangements apply if your last day of active membership was after 1 April 2008. However, if your last day was after 6 March 1995 but before 1 April 2008, you’re entitled to a lump sum worked out differently – you get a payment equal to five times the annual pension you were due plus the tax-free cash lump sum you could have expected to take. Deferred members whose last day was before 6 March 1995 aren’t entitled to swap their benefits for a lump sum payment.
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Members with entitlements in both sections of the 1995/2008 scheme:
if you have entitlements under both these sections of the NHS Pension Scheme, you will need to make separate applications to convert your ill-health pension benefits into a lump sum under each of them.
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Members with benefits in the 1995 or 2008 sections who are also members of the 2015 Scheme:
these members may also need to make separate applications to convert their ill-health benefits from each section into a one-off lump sum. But this only applies if you have had a break from scheme membership of more than five years. If you have joined the 2015 Scheme as part of the transitional arrangements, on or after 1 April 2015, and haven’t had a break of more than five years, you need only make one application.
Can I work after taking NHS ill-health retirement?
There are restrictions based on the type of work that you do and your total earnings. You are unable to work for more than 12 months and keep your Tier 2 ill-health pension.
What do all these rules mean in practice? Well, to give you some idea of the levels of benefit available, the NHS Pension Scheme publishes some worked examples of what doctors might be able to expect.
The full details of these examples are available online. They show, for example, that a member of the 1995 Section of the scheme due a £35,000 annual pension would be able to exchange this benefit for a one-off payment of £328,125; a member of the 2008 Section expecting a pension of £40,000 would be able to swap it for £299,999.99; a member of the 2015 Scheme would receive the same payment, though they might also have additional benefits related to previous memberships of the 1995 or 2008 sections.
You can find out more using the NHS ill-health retirement calculator here.
Content correct at time of writing and is intended for general information only and should not be construed as advice.