Pension Access Rules: Impact on Terminally Ill

Question

Asked by

To ask His Majesty’s Government, in light of the ongoing pensions review, what assessment they have made of the impact of current private pension access rules on the financial security of working-age people living with a terminal diagnosis.

My Lords, currently, individuals with a life expectancy of less than 12 months may take a serious ill health lump sum at any age, subject to medical evidence and scheme rules. This is tax-free below age 75, up to £1.073 million, after which it is taxed as income. However, while the current rules are intended to provide flexibility, the Government recognise that the permissive nature of these rules means that individuals may experience varying hurdles to access depending on their scheme. The Government wish 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.

My Lords, I thank my noble friend for his Answer. It is encouraging to hear that the Government will look again at this important issue. The rules on access to private pensions for terminally ill people were designed for an era when terminal diagnosis often meant death within months, but medicine has moved on. For cancer alone, around one-half of patients now survive 10 years or more, compared to just one in four in the 1970s. Can the Minister confirm that, when the Government look at this issue, they will ensure that access rules reflect modern clinical reality rather than leaving people who may live for many years with a terminal diagnosis unable to access funds that are rightfully theirs?

I am very grateful to my noble friend for her question. 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her that the current definition for when someone with a terminal illness can access their pension savings is clearly outdated and does not align with wider legislation, including the DWP’s standard definition, so I can confirm that the Government will now review this. Individual private pension schemes also have their own requirements for terminally ill people to access their pension savings. The Government will therefore also examine the access options across these schemes and will consider what changes may be needed to ensure that people have appropriate access while safeguarding against the risk of financial hardship later in life.

My Lords, I am very glad to hear the words of the Government and the Minister on this issue, because it is an issue where remedy is absolutely required. I add an additional point, which is that many of those who will die, sadly, of a terminal illness at a young age will have put money aside or been due a state pension had they lived to the normal end of life, and therefore the tax benefit that they get is very largely offset by the fact that they will never receive the state pension that is their due, so the net cost to the Government is not quite as some might think it is.

I am grateful to the noble Baroness for her support for what I said. As she said, unlike a personal workplace pension, which can potentially be drawn down earlier, a state pension can be accessed only at the state pension age, and there are no current plans to change this. However, for those nearing the end of their life, special benefit rules apply. These enable people who are nearing the end of their life to get faster and easier access to certain benefits without needing to attend a medical assessment and, in most cases, enable them to receive the highest rate of benefit. These rules apply to five benefits that support people with health conditions or disabilities: personal independence payment; disability living allowance; attendance allowance; universal credit; and employment and support allowance.

The Government’s review is much to be welcomed, because of the disparity. Given that 33% of working-age people with children who are terminally ill are recognised as dying in poverty, will the Government also look at the ability of people who withdraw their private pension to access a full range of benefits, including universal credit, so that they are not jeopardised and we do not end up with a situation where people who are trying to invest in their long-term future are penalised for doing so?

Yes, I think I can; I think that is broadly along the lines of what I covered in my previous answer—that those who are nearing the end of their life should be able to get faster and easier access to certain benefits. As the noble Baroness is asking, those benefits include support for people with health conditions or disabilities: personal independence payment; disability living allowance; attendance allowance; universal credit; and employment and support allowance.

I very much welcome the response from my noble friend the Minister. It is of particular importance that the variation in the schemes’ practice is part of the review, and obviously a full consultation will be required. When people provided with a pension have been encouraged to think of it as a pot of money, does my noble friend agree that it is particularly important that, at times of great personal difficulty, they have the opportunity to realise what they have been told is theirs?

Yes, I agree with my noble friend, and I am grateful to him for what he says about the review. As he says, individual private pension schemes have their own requirements for terminally ill people to access their pension savings. That does mean that, too often, individuals experience too many varying hurdles to access, depending on their scheme. The Government will examine the access options across these schemes and consider what changes may be needed to ensure people have appropriate access. To be clear, it is tax-free below the age of 75, up to a total sum of £1.073 million.

My Lords, The Pensions Review, along with a whole body of work done by organisations such as the Institute for Fiscal Studies, raises serious concerns about pension adequacy and retirement saving. What steps is the Minister taking to improve financial education and public understanding of the need to save adequately for retirement, particularly among groups such as the self-employed, who are less well served by the auto-enrolment system?

I am grateful to the noble Baroness for her ongoing championing of financial education. I know it is something that she feels passionately about and we have discussed it before. As she knows, financial education now forms part of the school curriculum in all UK nations. In England, financial education forms a compulsory part of the curriculum in mathematics at key stages 1 to 4 and in citizenship at key stages 3 and 4. Together, these cover personal budgeting, saving for the future, financial risk, managing credit and debt, and calculating interest. In terms of the adult population that she refers to, and small and medium-sized enterprises in particular, the DBT is considering this as part of its small businesses work, and I will certainly look into it further in light of her question.

I also thank my noble friend the Minister for carrying out this review. In doing so, I wonder if it will be possible to address the problem of inconsistencies in regulation. For example, the definition of “terminal illness” is different in pensions regulation and for the DWP. Can we come up with just one definition which is clear, consistent and also kind, given the circumstances under which it is going to be turned to?

There is a great deal in what my noble friend says. Obviously, I cannot prejudge the outcome of the review, but the principles that he sets out for what the definition should look like sound very sensible and important. We will now review the situation because, clearly, the definition currently is out of step and does not align with wider legislation, including the DWP’s standard definition. I cannot prejudge it, but I agree that it would be ideal if there was now one standard definition.

My Lords, does my noble friend the Minister share my concerns about the levels of stress and anxiety that this issue causes people who not only face huge practical and emotional challenges as a result of their terminal diagnosis but also find themselves having to navigate a complex and inconsistent pension system, largely at the discretion of private providers? Can he, in the review and when discussing this with colleagues, give further consideration to the additional practical support many in these circumstances may need at such a difficult time in their lives?

I am grateful to my noble friend. He is absolutely right that the current rules are obviously intended to provide flexibility, but the downside is that the permissive nature of those rules means that individuals may experience varying hurdles to access, depending on their scheme. That does not feel right, so that is exactly why the Government will now examine the access options across these schemes and will consider what changes may be needed to ensure people have the appropriate access. My noble friend is absolutely right about the stress and anxiety that must be experienced trying to navigate those different schemes with the different rules applying, so I absolutely agree wholeheartedly with what my noble friend says.