Retirement Planning If You Are In Ill Health

Lisa Smith, BA (Hons), CeFA

Making the right money choices for your family and loved ones if you are suffering from ill-health is often forgotten about.

Anyone suffering from a serious illness who has savings tied up in a final salary pension can make some changes to their retirement plans that could make them and their close ones better off.

Although final salary pensions are great for anyone retiring in good health who plans to live for another 30 years, they are not so good for someone who has a much lower life expectancy.

Final salary pensions do not consider how long a retirement saver might live.

The payment is based on length of service and salary instead.

Unlocking pension funds

For many who have a lower life expectancy, unlocking the transfer value and switching to a SIPP or Qualifying Recognised Overseas Pension Scheme (QROPS) for expats can offer a higher income and tax-free lump sum.

If the employer is offering a pension payment boost for leaving the scheme, this can also mean leaving a larger inheritance for your loved ones.

Moving the money from the final salary fund into a SIPP or QROPS typically means relying on the fund value to pay a regular income.

These pensions are also excluded from the inheritance tax regime. If a retirement saver dies before the age of 75, beneficiaries can withdraw the unspent fund tax-free.

If the saver dies aged over 75 or over, beneficiaries can still take the money, but must pay income tax at their marginal rate.

Unless they are a high rate (40%) taxpayer, this is less than the 40% inheritance tax rate imposed on an estate.

Other financial options

Another option is investing some of the money in an enhanced annuity that pays a guaranteed income until death.

Annuities come in for a lot of flak, but for retirement savers suffering ill health, they can offer a higher income that pensions or other investments.

Ill-health is considered to include obesity, smoking, heart problems or diabetes.

The annuity market tends to offer six out of 10 investors with health issues an income of up to a third more than a healthy customer.

If you are unsure about the best way to invest retirement savings, talk to a finance professional.

Moving any pension pot worth more than £30,000 comes with an obligation to talk to an adviser – either the free Pension Wise service or an independent IFA.

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