When can a whole pension be paid tax free on serious ill-health grounds?
Where a registered medical practitioner certifies that life expectancy is less than twelve months, uncrystallised pension funds can be paid as a single serious ill-health lump sum. Before age 75 it is paid free of Income Tax, subject to the lump sum and death benefit allowance, and after 75 it is taxed at the recipient's marginal rate.
- The condition: a registered medical practitioner certifying life expectancy of under twelve months.
- The funds: uncrystallised funds only; crystallised drawdown funds have their own rules.
- Before 75: paid free of Income Tax, tested against the lump sum and death benefit allowance.
- The trap: the money moves into your estate, where it may be taxed at 40%.
01 The conditions
A serious ill-health lump sum can be paid where a registered medical practitioner has certified that you are expected to live for less than twelve months, the scheme's rules allow it, and the funds are uncrystallised. All three have to hold.
Before age 75 the payment is free of Income Tax, tested against the lump sum and death benefit allowance of £1,073,100 rather than the smaller lump sum allowance. At or after 75 it is taxed at the recipient's marginal rate.
The whole of the uncrystallised arrangement has to be extinguished, so it is not a partial payment. Crystallised drawdown funds are dealt with separately and do not qualify.
02 Why it is often the wrong choice
The pension is a sheltered environment and your estate is not. Taking a large tax-free lump sum moves money from somewhere it might have passed to a beneficiary favourably into somewhere it may be charged at 40%, and for an estate already above the nil-rate bands that is a substantial loss.
Leaving the funds in the pension means they pass under the expression of wish. Death before 75 has historically allowed beneficiaries to take them free of Income Tax, and the announced Inheritance Tax change from April 2027 narrows but does not eliminate the difference.
So the lump sum is right where the money is needed — for treatment, for adapting a home, for time with family — and questionable where it is taken because it can be. This is a decision where the tax and the human considerations point in different directions and the human ones should usually win.
Shows: what a tax-free lump sum leaves after Inheritance Tax on the estate, against leaving the funds in the pension. Ignores: the beneficiary's own Income Tax position, the announced 2027 change, and the lump sum and death benefit allowance.
On the defaults above, the worked example shows £150,000. Taken as a lump sum into an estate above the bands, £100,000 is lost to Inheritance Tax that would not have arisen inside the pension.
Source: Inheritance Tax
03 What to do alongside it
Update the expression of wish on every pension, because that document decides who receives what remains and how. It is the single most valuable form in this situation and it is frequently years out of date.
Check whether any scheme provides a separate death-in-service benefit or a dependant's pension, since those are not affected by taking a lump sum from a different arrangement and may be more valuable than the pot itself.
And put both lasting powers of attorney in place if they are not already. Capacity can change quickly, and every other decision on this list requires someone able to make it.
Source: Lasting power of attorney
The rule exists for a reason and the reason is not tax planning. Where the money is needed — for treatment, for adapting a house, for the year you have — take it, and do not let an arithmetic argument stop you. Where it is being taken because it can be, look at the estate first: a tax-free payment into an estate already above the nil-rate bands hands 40% of it back, and the same money left in the pension might have passed to a beneficiary far more favourably. And whatever is decided, update the expression of wish that week.
FAQ
What certifies serious ill health?
A registered medical practitioner certifying that you are expected to live for less than twelve months. The scheme's rules must also permit the payment, and only uncrystallised funds qualify.
Is the lump sum always tax free?
Before age 75, yes, subject to the lump sum and death benefit allowance. At or after 75 it is taxed at the recipient's marginal rate, which changes the calculation substantially.
Should I take it if I do not need the money?
Often not. It moves funds from a sheltered pension into your estate, where they may be charged at 40% if the estate is above the nil-rate bands. Leaving the funds in the pension keeps the expression of wish route open.
Sources
Regulator references
- Tax on your private pension contributions · GOV.UK · 2025The relief, allowance and charge framework the whole post sits inside.Last verified: 2026-09-07
- Inheritance Tax · GOV.UK · 2025The nil-rate band, the 40% rate and what forms part of the estate.Last verified: 2026-09-07
- Lasting power of attorney · GOV.UK · 2025The two types of LPA and what each one lets an attorney do.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.