The UK Government has pledged to revise rules that allow terminally ill people to access their private pension savings early, acknowledging that the current system creates barriers for those with life-limiting conditions. Treasury minister Lord Livermore admitted the existing definition of terminal illness is 'clearly outdated' and does not align with modern clinical realities.
Current Rules and Their Limitations
Under present regulations, individuals with a life expectancy of less than 12 months may take a Serious Ill Health Lump Sum from their private pension. This sum is tax-free for those under age 75, up to a limit of £1.073 million. Any amount above that is taxed as income. However, critics argue that the rule fails to account for advances in medicine that allow many people with terminal diagnoses to live significantly longer.
Labour peer Baroness Martin of Brockley, a former chief of staff to Chancellor Rachel Reeves, highlighted the issue in the House of Lords. She noted that some people with terminal illnesses may live 10 years or more, yet are unable to access their pension savings because they do not meet the one-year life expectancy threshold. 'For cancer alone, around half of patients now survive 10 years or more compared to just one in four in the 1970s,' she said.
Government Response and Review
Responding to Baroness Martin, Lord Livermore said: 'While the current rules are intended to provide flexibility, the Government recognises that the permissive nature of these rules means individuals may experience varying hurdles to access depending on their scheme. The Government wishes to ensure a fair and compassionate approach to allowing access to pension savings in cases of terminal illness, and will therefore now consider this issue in further detail.'
Lord Livermore confirmed that the Government will review the definition of terminal illness in pension regulations, with an aim to align it with the Department for Work and Pensions (DWP) standard definition. 'I agree with her that the current definition for when someone with a terminal illness can access their pension savings is clearly outdated and does not align with wider legislation, including the DWP standard definition, so I can confirm the Government will now review this,' he stated.
Impact on Pension Schemes
The review will also examine the varying requirements across individual private pension schemes, which currently set their own criteria for terminally ill members. Lord Livermore noted that the Government will consider what changes are needed to ensure appropriate access while safeguarding against the risk of financial hardship later in life.
In a parallel development, two Government-backed pension fallback schemes for employers that have gone bust have already updated their rules. Following reforms in the Pension Schemes Act, the life expectancy criteria for claiming a terminal ill health payment has been raised from six months to one year, bringing it in line with DWP rules. Sara Protheroe, chief customer officer at the Pension Protection Fund, said this change would allow members to 'access financial support sooner, at a time when it can make a real difference.'
Call for Modernisation
Baroness Martin welcomed the Government's commitment to review the rules, but urged that the new definition reflect modern clinical reality. 'The rules on access to private pensions for terminally ill people were designed for an era when terminal diagnoses often meant death within months, but medicine has moved on,' she said. She pressed the minister to ensure that people who may live for many years with a terminal diagnosis are not left unable to access funds that are rightfully theirs.
Lord Livermore responded that while he could not prejudge the outcome, 'it would be ideal if there was now one standard definition' across pensions and DWP regulations. The review is expected to consider changes that will make it easier for terminally ill individuals to access their savings without facing unnecessary bureaucratic hurdles.
