Serious Ill Health Lump Sum: Eligibility, Tax, and Benefits Impact

A serious ill health lump sum lets you take your entire uncrystallised pension pot as a single cash payment once a registered medical practitioner confirms in writing that you have less than a year to live. If you’re under 75 and the payment fits within your Lump Sum and Death Benefit Allowance (£1,073,100 for most people), it comes to you free of income tax. From your 75th birthday onward, the whole payment is taxed as pension income at your marginal rate. The framework sits in Schedule 29 of the Finance Act 2004, and the difference between qualifying cleanly and getting it wrong can run into tens of thousands of pounds.¹

Who Qualifies

Three conditions all have to be satisfied before your scheme can pay. The administrator must hold written evidence from a registered medical practitioner stating you are expected to live less than one year. The payment must extinguish all your uncrystallised rights in that particular arrangement. And you need enough headroom in your Lump Sum and Death Benefit Allowance for the payment to be fully tax-free.²

The “uncrystallised rights” condition catches people out. If you’ve never drawn anything from a pot, the whole pot is uncrystallised and pays out. If you’ve already started flexi-access drawdown from an arrangement and then receive a terminal diagnosis, you can still take a serious ill health lump sum from what remains uncrystallised. What you cannot do is take one from funds already designated for drawdown, because those are crystallised.²

Each pension arrangement stands on its own. Three pots with three providers means three sets of medical evidence and three separate assessments, and each payment must clear out the uncrystallised rights in its own arrangement.¹

Tax if You Are Under 75

Take the payment before your 75th birthday and there is no income tax charge, provided the total stays within your available Lump Sum and Death Benefit Allowance.² For most people that allowance is £1,073,100, which mirrors the old lifetime allowance. If you hold lifetime allowance protection from the previous regime, your personal figure may be higher.

Where the lump sum runs over your allowance, only the excess is taxed, and that excess is treated as pension income at your marginal rate.² A £1,200,000 pot paid to someone with the standard allowance would deliver £1,073,100 tax-free and about £127,000 taxed as income.

Tax at 75 and Over

Once you reach 75, the tax-free treatment goes away completely. The full serious ill health lump sum is taxed as pension income at your marginal rate.² It stacks on top of whatever else you receive in the tax year, and a substantial pot will usually push you into higher bands.

In England, Wales, and Northern Ireland, the 2025/26 bands (frozen through to 2028) are:

Personal Allowance: up to £12,570 at 0%
Basic rate: £12,571 to £50,270 at 20%
Higher rate: £50,271 to £125,140 at 40%
Additional rate: over £125,140 at 45%

Your provider normally deducts the tax before paying you.³

Scottish Taxpayers

Scottish taxpayers face a different and steeper set of bands for 2025/26:

Starter rate: £12,571 to £15,397 at 19%
Basic rate: £15,398 to £27,491 at 20%
Intermediate rate: £27,492 to £43,662 at 21%
Higher rate: £43,663 to £75,000 at 42%
Advanced rate: £75,001 to £125,140 at 45%
Top rate: over £125,140 at 48%

A large pot paid to a Scottish taxpayer at 75 or over can hit a top marginal rate of 48%, three points above the rest of the UK.⁴

If Too Much Tax Was Deducted

Providers sometimes apply an emergency tax code to a serious ill health lump sum, particularly if HMRC hasn’t sent them an up-to-date code. The result is usually far too much tax taken at source. You can reclaim in-year using HMRC’s form P53Z.⁵

The form can be completed online through GOV.UK, but you can’t save your progress partway. Once done, print it, sign the declaration, and post it to HMRC. You’ll need parts 2 and 3 of any P45s from your pension payments, your National Insurance number, and details of other income for the year. Estimates rounded down to the nearest pound are acceptable if you don’t yet have final figures, and HMRC reconciles at year-end. Refunds come by payable order to your home address, not by bank transfer.⁵

How to Apply and How Much You’ll Get

The starting point is a written statement from a registered medical practitioner confirming you are expected to live less than one year. It needs to be specific enough for the scheme administrator to satisfy themselves that the statutory test is met. Most schemes also have their own claim form covering personal details, policy number, and the arrangement being closed. The administrator verifies the practitioner’s credentials and the prognosis, sometimes contacting the signing doctor directly, then calculates the fund value and pays. Processing times vary by scheme, but administrators tend to prioritise these claims given the circumstances.

For a defined contribution pot, the payment is simply whatever is in the pot at the point of payment, and market movements between application and payment can shift the final figure. For a defined benefit scheme there is no statutory formula: trustees convert your pension entitlement to a capital sum using commutation factors that vary between schemes. If a defined benefit figure looks low, ask the administrator to explain the factors used. Any contracted-out dependants’ benefits are typically moved to a separate arrangement first so they don’t block the payment.²

What the Cash Does to Means-Tested Benefits

A large sum landing in your bank account can knock you off benefits you currently rely on. This is easily missed if you also receive Universal Credit, Pension Credit, or council tax support.

Universal Credit has a hard capital ceiling of £16,000. Cross it and entitlement stops. Between £6,000 and £16,000, the first £6,000 is ignored and the rest is treated as producing a notional monthly income of £4.35 for every £250, which cuts your payment regardless of what the money actually earns.⁶

Social care funding follows a similar pattern. In England, local authorities look at your capital when deciding whether to fund residential or nursing care. Above £23,250 you pay in full. Between £14,250 and £23,250 you contribute a tariff income of £1 a week for every £250 above the lower limit. Below £14,250 your capital is disregarded.⁷

Giving the money away or spending it down to duck these thresholds doesn’t work. The DWP and local authorities can apply the notional capital rule, adding the money back to your assessed assets as if you still held it.⁶ Legitimate spending on care, everyday living, or adapting your home is fine; deliberately depleting savings is not.

The Inheritance Tax Trade-Off

This is where the decision gets genuinely difficult. Under current rules, in force through 5 April 2027, unused pension funds held in discretionary schemes sit outside your estate for inheritance tax. Leave the pension untouched and beneficiaries can receive death benefits without an IHT charge.⁸ Withdraw it as a serious ill health lump sum and the cash enters your personal estate, where anything above the nil-rate band of £325,000 is potentially exposed to inheritance tax at 40%.

For someone under 75 with a modest pension and real need for the cash, taking the tax-free lump sum is often the right call. For someone with a large fund and other assets already above the IHT threshold, withdrawing money you don’t immediately need can create a six-figure liability for your family that wouldn’t have existed had the pension stayed put.

From 6 April 2027 the picture changes. The government plans to bring most unused pension funds within inheritance tax on the member’s death.⁹ Death-in-service benefits from registered schemes and dependants’ pensions from defined benefit arrangements are excluded, but most defined contribution pots will be caught. Once that takes effect, the IHT advantage of leaving money in the pension largely falls away, and the calculus tips more toward drawing the lump sum if you need the cash. Personal representatives will report pension values and pay any IHT due.

Because the income tax on the payment, the inheritance tax on your estate, and the loss of means-tested benefits pull in different directions, speaking to a financial adviser before you commit is usually worth the fee.

1
UK Legislation. Finance Act 2004, Schedule 29, Part 1 – Serious Ill-Health Lump Sum
2
HM Revenue & Customs. Pensions Tax Manual – PTM063400: Serious Ill-Health Lump Sum
3
GOV.UK. Income Tax Rates and Personal Allowances
4
mygov.scot. Scottish Income Tax – Current Rates
5
HM Revenue & Customs. Claim a Tax Refund When You’ve Flexibly Accessed All of Your Pension (P53Z)
6
MoneyHelper. How Do Savings and Lump Sum Payouts Affect Benefits?
7
House of Commons Library. Paying for Adult Social Care in England
8
GOV.UK. Inheritance Tax – Unused Pension Funds and Death Benefits
9
GOV.UK. Inheritance Tax on Unused Pension Funds and Death Benefits