Serious ill health lump sum (SIHLS) guide

What is the serious ill health lump sum? 

A serious ill health lump sum may apply where someone has a life expectancy of less than a year and is under age 75. It may be possible for all non-drawdown/uncrystallised funds to be paid entirely as a tax-free lump sum. It’s not limited to those that have reached the normal minimum pension age (currently 55, rising to 57 in 2028). 

The payment can be used to help with some of the financial challenges that may have resulted from your illness – for example repaying debts, such as a mortgage, or making adaptations to your home. 

To qualify for a serious ill health lump sum, certain conditions will need to be met: 

• A doctor (or registered medical practitioner) will need to provide written evidence that you have less than 12 months to live
• The payments must be permitted by the individual scheme’s rules 
• The payment can only come from uncrystallised pension benefits 
• The payment must use up all of the remaining uncrystallised pension benefits 

Even if you don’t qualify for serious ill health lump sum when you are first diagnosed, it’s worth keeping it in mind as part of the financial planning process, in the event that your health deteriorates. 

How do serious ill health lump sums affect the LSA and LSDBA? 

Following the abolition of the lifetime allowance (LTA) on 6 April 2024, two new allowances were introduced that cap the tax-free lump sums you can take from a pension: the lump sum allowance (LSA) and the lump sum and death benefit allowance (LSDBA). 

Unless a member has any additional protections, the standard LSA is £268,275 while the standard LSDBA is £1,073,100. The LSDBA is equivalent to the amount of the LTA before it was abolished, while the LSA is 25% of that figure. 

When a serious ill health lump sum is paid, any tax-free element will be tested against the LSDBA and not the LSA. However, any previous lump sums taken from any pensions that may have counted towards the LSA will also be taken into account and reduce the remaining LSDBA available. 

These rules apply to payments made after 6 April 2024. Transitional rules apply for payments taken before that date. 

In these cases a standard transitional calculation is used: 

• 25% of the lifetime allowance used by the SIHLS will be taken from the LSA 
• All of the lifetime allowance that was used by the SIHLS will count towards the LSDBA 

How will serious ill health lump sums be taxed? 

The tax treatment of serious ill health lump sum depends on the age of the member when the payment is made and the amount of the LSDBA that remains available. 

The full amount of the payment will count towards the LSDBA and, so long as there is enough allowance remaining, it will be paid free of tax. In circumstances where there is not enough LSDBA remaining to cover the whole serious ill health payment, the excess will be taxed at the member’s marginal rate of income tax.