If ill health means you have to retire early

However carefully you’ve planned your retirement, things don’t always go according to plan. If you’re having problems with your health you might need to retire earlier than you expected.

There’s plenty to think about as you approach retirement – but nothing is more important than your health. Aviva can help you understand how retiring earlier might affect your plans. We can also help you consider what to do if you find you need to change things.

What do we mean by ill health?

Serious – or potentially serious – conditions such as stroke, heart disease, cancer or diabetes are examples of illnesses which sometimes cause people to bring forward their retirement date. People suffering from conditions such as these may also qualify to receive a higher income if they buy an annuity – a financial product which pays you an income for the rest of your life. More on this later.

Being diagnosed with a terminal illness can also affect your options – for instance, it could mean you’re able to take all of your pension fund as cash. For these purposes, a terminal illness is usually defined as an incurable condition where the individual concerned is likely to have 12 months or less to live.

If you’re already an Aviva pension customer and you are diagnosed with a terminal illness, please call us on 0800 533 5195 so we can guide you through your options.

What you need to consider…

If it looks as though you’ll need to finish work earlier than you imagined, there are a number of questions you’ll need to ask yourself.

  • Do you need an income from your pension fund?
  • Do you need to provide for any dependants?
  • Do you know what state benefits you may be entitled to?

You may well have thought about these issues already – but retiring earlier than you’d imagined may mean you need to resolve them sooner. We can help…

Getting an income from your pension fund

If you have a private pension plan – with Aviva or another provider – you may wish to use it to provide a regular income during your retirement. You’ve probably heard that the government are introducing more freedom in how you can access money in your pension fund. Some important changes take effect from April 2015; so if you have to retire earlier than you’d planned, this may change your options when you retire.

If you’re retiring before April 2015…

At the moment, you can usually take up to 25% of your pension fund as a tax-free cash lump sum. But you have to take a taxable income with the rest. This might mean buying an annuity to provide an income for life, or using income drawdown to take income when you need it, leaving the rest of your fund invested.

If you’re retiring in April 2015 or afterwards…

From this date, you’ll be able to take your entire defined contribution pension fund as a lump sum when you reach 55. It won’t matter how much you have in it, or if you have any other sources of income. You’ll normally be able to take the first 25% as tax-free cash, and you’ll pay tax at your marginal rate on the rest.

To find out more about accessing the money in your pension fund, it’s worth reading the information on how can I take money from my pension If you have this type of fund, options including annuities and income drawdown will still be available for people who don't want to take the whole fund as a lump sum.

This change won’t apply to defined benefit pension funds, or final salary pensions as they’re more commonly known.

If you’re providing for dependants

If you’re used to being the main provider in your household, it can be hard to get used to the idea of retirement – still more so if your health isn’t perfect. For your peace of mind, it’s important to make retirement income choices that are right for you and your dependants.

Checking what benefits you could claim

Any state benefits you currently receive could be affected if you retire early. You should also check if you’re eligible for any benefits due to conditions related to your health.

You’ll find more information by visiting What state benefits am I entitled to?. This section of our website also covers your State pension entitlement. For up-to-date information on the amounts you may receive, check with your local benefits office or online at www.gov.uk.

How illness could affect you retirement income choices

If you choose an annuity

Sadly, ill health can often have a negative effect on your finances – as you’ll know if you’ve been prevented from working. But if you choose an annuity to provide an income for you during retirement, ill health can actually mean you get a better deal. This is because you may be entitled to enhanced benefits since your condition may affect your life expectancy.

Read more about annuities here.

What this might mean in practice

Read about Peter and how an annuity with enhanced benefits meant a higher income than he was expecting.

If you buy a single life annuity you need to know that the income it provides will normally cease when you die. Some annuities will continue paying an income to a dependant for a time if this happens, but it’s important to shop around and make sure you know exactly what you’re buying before you make a decision. You could also consider a joint life annuity, which would guarantee your partner an income for life should you die first.

If you choose income drawdown

Thinking about your dependants is also important if you choose to use income drawdown to provide you with an income in retirement. Remember, if this type of retirement income is your choice, you’ll be taking income as you need it, while the rest of your fund stays invested.

You’ll need to specify how you’d like the money from your fund to be distributed among your dependants in the event of your death. You can decide whether you’d like your dependants to receive only an income, or to have the choice of a lump sum after tax has been deducted.

Read more about income drawdown here.

My Retirement Planner

This online tool is a good place to start when you want to estimate how much retirement income you may receive and how long it could last. It’s only intended to help give you a rough indication of how things are going, and whether your plans are on course.

It’s easy to use and only takes a couple of minutes.

My retirement planner

Pension annuity calculator

Our simple calculator can help you form an idea of how much income you may get from a pension annuity during your retirement.

Pension annuity calculator

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