Although many schemes provide enhanced benefits on ill-health early retirement, some apply early retirement factors, with the result that, for members who have reached the scheme's minimum retirement age, the benefits on an ill-health retirement may not be any greater than those payable on standard early retirement. As a result, these members may be told that there is no point in going through the extra hassle of applying for ill-health retirement.
However, trustees and administrators need to bear in mind that from the point of view of the Pension Protection Fund (PPF), the two categories of pensioners are treated very differently.
Under the PPF compensation rules, a pensioner who has not reached normal pension age before their scheme is assessed for entry into the PPF receives only 90% of their pension as compensation. In addition, their compensation is tested against the compensation cap (currently £37,420.42). By contrast, a member who retired early on ill-health grounds would receive full compensation for their pension and it would not be assessed against the cap. The PPF is not in a position to treat a member who applied for and received a standard early retirement pension as someone who retired on ill-health grounds, even if they would have met the conditions for ill-health early retirement.
Comments & Actions
- If your scheme is one where there is no financial difference between an ill-health and normal early retirement pension, scheme administrators and trustees should keep this in mind when advising members in ill health about their retirement options.
- If the member is actually suffering from ill-health, it may be better to advise them of this issue, and invite them to apply for an ill-health pension.