Planning your pension when you have cancer
Pensions are long-term investments with special tax rules, for example you can get tax relief on contributions. Whatever your age, if you're living with cancer, thinking about your pension could be useful for various reasons.
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Most people can claim a State Pension once they reach State Pension age. This is currently 65 for men and 61-65 for women, depending on when you were born.
The State Pension is currently made up of two main parts: Basic State Pension and Additional State Pension. The government has announced that, for people reaching State Pension age from April 2017 onwards, these are to be replaced by a new single-tier State Pension.
You build up Basic State Pension by paying national insurance contributions while you’re working, or through national insurance credits given in some circumstances when you can’t work.
Employees (but not people who are self-employed) are eligible for Additional State Pension. This is extra money on top of your Basic State Pension. You build up your entitlement by paying national insurance contributions while working.
Protecting your right to State Pension
There may be times when you’re not paying national insurance because you’re off work sick, unemployed or not earning enough. In these situations, you usually continue to get national insurance credits. These cover the contributions you were unable to pay and protect your entitlement to Basic State Pension.
People who aren’t in work because they’re caring for children, caring for a frail or disabled adult, or are themselves affected by a disability, can also be credited with some Additional State Pension.
You’re likely to still build up national insurance credits (and therefore State Pension) if you:
are unable to work because of illness or disability
care for someone who is ill or disabled for at least 20 hours a week, but fewer than 35 hours a week
care for a child under 12 for whom you get Child Benefit (if an older child has a disability, credits may be given under the caring condition above)
get Working Tax Credit (or the new Universal Credit from October 2013) and your earnings are too low to have to pay national insurance contributions
are a man not paying national insurance contributions who has reached the age at which a woman would be able to claim her State Pension, but you’re still too young to claim your own State Pension.
In other situations, periods off work will probably appear as gaps in your national insurance record, which may reduce the amount of State Pension you eventually get. But you currently only need 30 years of national insurance contributions and credits for a full Basic State Pension, so you may not need to worry about filling these gaps. From April 2017, the number of years of contributions you need for a full Basic State Pension is due to rise to 35. And you’ll need at least a minimum number of years of contributions and credits (expected to be 10) to get any State Pension at all.
State Pension age
The minimum age at which your State Pension can start is currently 65 for men. Between April 2010 and November 2018, the qualifying age for women is rising from 60 to 65, so it depends on when you were born. State Pension age for both men and women will then increase to 66 by March 2020. It’s due to rise to 67 in 2028 and will be reviewed every five years after that. It’s important to start planning your pension early. Even if you are many years below pension age, it’s helpful to know now when you will reach State Pension age.
Income for early retirement
You can’t start getting your State Pension before you reach State Pension age. But if you can’t work because of illness or caring responsibilities, or if your household income is low, you may be able to claim other state benefits instead.
Death before State Pension age
If you’ve paid or been credited with enough national insurance, under the current rules your surviving husband, wife or civil partner may be able to claim bereavement benefits. These are due to be simplified from 2016 and will then be payable provided your late spouse or civil partner had paid just one year or more of national insurance.
Unmarried partners can’t claim bereavement benefits. However, there is an exception for couples in Scotland who have been living together since before 4 May 2006, and who can show that their relationship amounts to an ‘irregular marriage by cohabitation with habit and repute’.
If your surviving family members’ income and savings are low, they may qualify for means-tested benefits (see our financial jargon buster), or an increase in benefits that they already claim.
For more information about bereavement benefits, you can speak to a welfare rights adviser by calling the Macmillan Support Line.
Occupational or company pension
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If you belong to an occupational or company pension scheme and you’re getting sick pay during a period when you’re off work sick, you will usually continue to build up your occupational pension as normal. If you’re off for a prolonged period, your pension may stop building up.
If you take time off for caring responsibilities, your pension will be unaffected if you’re using up your holiday allowance. Beyond that, your pension may be affected.
If you cut back your hours and this means your pay is less, this is likely to reduce the pension you’re building up.
In all the situations above, exactly what happens to your pension rights and when depends on your contract of employment and the rules of your particular scheme. To check the impact of time off or reduced hours on your occupational pension, talk to the personnel or human resources (HR) department at work. To check how much pension you may get at retirement, check the latest benefit statement from the scheme. You should be sent a statement each year.
Income for early retirement
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Under government rules, the earliest you can normally start drawing a pension from an occupational scheme is age 55. But you can start your pension earlier than this if you’re no longer able to work because of ill health.
There are two types of occupational pension scheme:
Defined benefit schemes
Your employer promises to give you a specified level of pension when you retire, based on your earnings and/or length of service. Common examples are final salary schemes and career average salary schemes, where the pension you get is based on your pay while working.
Defined contribution schemes
This is like your own savings pot. Your own and your employer’s contributions are paid in and invested. You use the fund you receive back at retirement to buy or provide your pension.
Most employers can no longer set a normal (compulsory) retirement age. However, occupational schemes can still set a normal pension age from which your full pension is payable. Starting your pension earlier usually means your pension is a lot lower. Some schemes (usually final salary schemes) can enhance the pension you get if you’re retiring because of ill health.
You can usually take part of the proceeds of your pension scheme as a tax-free lump sum. If you have a reduced life expectancy, some schemes can increase the lump sum further and reduce the pension payments.
In a defined contribution scheme, you would usually use your pension fund to buy a lifetime annuity. This is a special type of investment sold by insurance companies where, in exchange for your pension fund, you get an income payable for the rest of your life.
The occupational scheme may have arrangements to offer you an annuity, but you always have the option of shopping around and buying your annuity elsewhere to get a higher income.
In general, it’s worth shopping around anyway, but it’s especially important to do so if you have or have had cancer, or if your health is otherwise poor. This is because you’re likely to qualify for an ‘impaired-life’ annuity (see below). This will pay out a higher income than you would normally get.
Alternatively, you can choose to leave your pension fund invested, drawing off part of it on a regular basis to provide your pension direct from the fund - this is called ‘income drawdown’. Choosing income drawdown may enable you to strike a better balance between having a pension now and leaving something for your dependants later on. You may have to move your pension fund out of the occupational scheme into a personal pension if you want to choose income drawdown.
To shop around for an annuity or to discuss income drawdown, contact a financial adviser. You can find an adviser through Unbiased.co.uk or the Institute of Financial Planning, or you can search for a financial adviser online on the findanadviser.org website.
To find out whether you’re eligible for early retirement from your occupational scheme, and how much lump sum and pension you may get, talk to the personnel or HR department at your work.
Impaired-life and enhanced annuities
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Some pension providers offer impaired-life or enhanced annuities. An impaired-life annuity pays more to people with particular health problems (including cancer and problems such as high blood pressure). It is based on your personal circumstances. An enhanced life annuity is less tailored to your individual situation.
It is offered to people with particular lifestyles, including people who smoke, who may not be expected to live as long.
It’s important to shop around for the best deal if you are looking for an impaired-life annuity. You may want to hire a financial adviser to help you with this. You can find one through Unbiased.co.uk, the Institute of Financial Planning or the Personal Finance Society. Call our financial guides for more information about these options.
Death before claiming an occupational pension
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Occupational or company pensions may provide a lump sum to a person/people you have nominated if you die before claiming the pension. In a defined benefit scheme, the value of the lump sum is usually calculated as a multiple of your final earnings. In a defined contribution scheme, it will typically be the value of the fund you have built up. If you die before age 75 and the lump sum is paid within two years of your death, the lump sum can generally be paid without any tax charge, otherwise tax charges may apply. Call our financial guides for more information.
You may have this type of pension through your workplace, or you may have taken out a scheme for yourself, for example if you’re self-employed.
With a workplace scheme, your employer may be paying in contributions for you (and will have to if you are covered by the system of automatic enrolment into pension schemes being introduced between October 2012 and February 2018). These will normally continue while you are off sick. With a scheme you’ve taken out for yourself, you’ll continue to build up a personal pension if you keep paying contributions into your scheme. If you’re off work or reduce your hours and your income falls, you may find it hard to keep the contributions going. If you stop, your eventual pension will be lower. Check whether your personal pension includes a waiver of premium benefit. This takes over making the contributions if you can’t work because of illness.
To check the rules and options for a personal pension, see the scheme’s terms and conditions, or talk to the provider. To check how much pension you may get at retirement, see the latest benefit statement from the scheme - you should be sent a statement each year.
Automatic enrolment into a workplace pension scheme
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Since October 2012 and up until February 2018, most employees are automatically being enrolled into a pension scheme at work.
If you are automatically enrolled, you can opt out within one month and your contributions will be refunded. Otherwise, you can opt out at any time but the contributions you’ve paid so far stay invested in the scheme, becoming part of your pension. Workers who opt out are automatically re-enrolled every three years (and so would have to opt out again if they still did not want to be in the scheme).
If cancer means your household income is tight, you may want to stop your contributions for a while, but think carefully before doing this. Opting out means you lose your employer contributions too, and your eventual pension will be lower. Bear in mind that the pension scheme may offer an early pension due to ill health and/or life insurance cover as well as a retirement pension.
For more information about automatic enrolment, visit the Gov.uk website.
Income for early retirement
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Under government rules, the earliest you can normally start drawing from a personal pension is age 55. But you can start your pension earlier than this if you’re no longer able to work because of ill health (see below). You can take part of the proceeds of your pension scheme as a tax-free lump sum. The rest must usually be drawn as taxable pension.
All personal pension schemes are defined contribution schemes. This means you build up your own savings. Your contributions are paid into the scheme and invested. You use the resulting fund, received at retirement, to either buy a pension (annuity) or to provide one (by choosing income drawdown, where you draw a pension direct from the fund).
Normally, the earlier you start drawing your pension, the lower the amount you will get each year.
You don’t have to buy an annuity or draw your pension from the same company you’ve built up your savings with. They might offer you an annuity or pension fund, but it’s worth shopping around. Doing this will often mean a big increase in the pension you get, particularly if you qualify for an impaired-life annuity (see below). To shop around for an annuity or to discuss income drawdown, contact a financial adviser – find one through Unbiased.co.uk or the Institute of Financial Planning, or find a financial adviser online on the findanadviser.org website.
Retirement due to ill health
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There are two types of ill-health retirement, and which one suits you will depend on your prognosis.
If you’re unable to work, you can ask to retire on the grounds of ill-health. With this option, you could take up to 25% of your pension fund as a tax-free lump sum. You can then, as a result of your diagnosis, use the remaining fund to purchase a life-impaired or enhanced annuity. This would provide you with a monthly pension that is taxed as income.
Alternatively, your fund could be placed into income drawdown, where you draw your pension (still taxed as income) directly from the fund. Anything left in your fund, if you die, could be used to provide pensions for your partner and dependent children, or inherited as a lump sum after tax has been deducted.
If you have a prognosis of fewer than 12 months to live, you can retire on the grounds of serious ill-health. With this option, you can usually take your whole pension fund as a lump sum. If you are under 75, usually the whole sum will be tax-free. In order for this option to be granted, the scheme administrator must receive evidence from a registered medical practitioner that your life expectancy is less than a year. Remember, if you take this option, you will use up your whole fund, so there will be no benefits payable to your family if you pass away.
If your pension savings are small
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If you’re aged at least 60 and the total value of all your occupational and personal pension savings is no more than a given limit (£18,000 in 2013-14), you can take the whole lot as a cash lump sum instead of turning it into pension. A quarter of the lump sum will be tax-free, but the rest is taxable as income for the year in which you receive it.
Regardless of the value of your total pension savings, you can usually take the proceeds from an occupational scheme as a lump sum if the value is no more than £2,000. A quarter of the lump sum will normally be tax-free, but the rest is taxable as income for the year in which you receive it.
Under new rules introduced in April 2012, you may also be able to cash in personal pension pots of no more than £2,000, but only up to two times during your lifetime. Certain rules apply and you must be aged at least 60. Call our financial guides for more information.
To check the value of your pension savings, check your latest benefit statement or talk to the pension provider.
If you’re getting state benefits, the decision whether to take your occupational or personal pension as a small regular pension or a lump sum may affect the benefits you get both now and in the future.
This can be complicated to work out, so you may want to contact our welfare rights advisers to talk it over - call the Macmillan Support Line.