Paying ill-health benefits through an occupational pension scheme

Many occupational pension schemes pay ill-health pensions when a scheme member finds they can no longer work because of the state of their health. Benefits will vary depending on the rules of the scheme.

Some schemes will provide different levels of benefits depending on the seriousness of a worker's illness and what work, if any, they may be capable of doing in the future. A scheme will normally only pay these benefits if the person is still contributing to the scheme.

Schemes often pay people the full value of their pension and do not reduce it even though it is being paid before the worker reaches their expected retirement age.

Some companies provide their ill-health benefits through an insurance company rather than the pension scheme. These are known as Permanent Health Insurance Schemes. In this circumstance it is the insurance company that decides what benefits (if any) a person is entitled to according to their health issues and ability to work in the future.

Calculating ill-health benefits

There are a number of ways of calculating ill-health pensions. Pension trustees should ensure that they understand what benefits their pension schemes provide. The pension scheme rules will state when a person will qualify for ill-health benefits, and what those benefits will be. The test set out in the rules could contain several different elements, so it is important not to overlook any when working out what someone is entitled to.

Dealing with applications

Trustees must know the process for dealing with ill-health cases. In some schemes the employer must consent to the payment, and in others the trustees have the discretion to agree to the pension. Sometimes both employer and trustees will be involved.

Trustees need to gather facts and evidence to properly evaluate an application for ill-health benefits. This may include investigating the demands of an applicant's job.

Medical advice

Trustees should also seek advice from a registered medical practitioner. It is also important that the medical practitioner understand what advice is needed. For example, the trustees may need a medical opinion about the member's fitness for work or about whether the illness is likely to be permanent.

It is unusual for the pension scheme rules to require a doctor to decide whether an ill-health benefit should be granted. Although it may be in the applicant's medical interests to retire, this may not be relevant to whether ill-health benefits must be paid in their individual circumstance.

Applicants must consent to any medical examination and agree to the doctor informing trustees of the results. Trustees should obtain this consent at the beginning of the ill-health application. Trustees should consider obtaining additional medical evidence if a solitary examination provides inconsistent evidence or does not help trustees determine whether an applicant is entitled to ill-health benefits.

Applicants should also be given the opportunity to comment on the medical evidence about them before trustees make a decision.

Trustees that are required to provide reasons for their decisions should be careful how they word their assessment so as not to infringe the right to privacy of ill-health applicants.

Short life expectancy and reviews

HM Revenue & Customs allow an ill-health pension to be paid as a single lump sum if an applicant is not expected to live more than a year. It is important that trustees have a process in place that allows them to react quickly to applications if the circumstances demand it.

Pension scheme rules often allow trustees to review ill-health pensions at a later date. Trustees must explain to applicants that the pension can be reduced, or even suspended, if the applicant's health improves.