Warning bells have been sounded over hundreds of taxpayers potentially facing an unexpected tax bill if they retire early due to ill health.

Insurer Royal London has urged those workers who take early retirement to be wary of breaching their annual allowance for pension tax relief, particularly those in public sector schemes such as teachers or nurses.

According to Steve Webb, director of policy at Royal London, when workers are no longer able to stay in employment as a result of ill health, they can often be awarded a “significant overnight boost” to their pension value.

In some schemes, a worker can be treated as if they had continued working from the date of early retirement to their pension age. Additional pension rights would therefore be added in one lump sum.

Mr Webb warned that the tax system would then treat this lump sum as a significant contribution into the pension in a single year – leading to an unexpected tax bill if the growth in value exceeds the £40,000 annual limit.

He said: “Pension schemes do not hand out early retirement benefits lightly, and it seems very harsh to punish those who are in poor health with big tax bills.

“It is not the case that the workers who face these bills have been shovelling money into a pension in order to max out on pension tax relief.

“They have simply found themselves unable to do their job, often through no fault of their own, and it is quite wrong to saddle them with a large tax bill as a result.”

A Freedom of Information request submitted to the Greater Manchester Pension Fund by Royal London showed in the last tax year ten members of the scheme received letters warning their pension growth had taken them above the annual allowance of £40,000.

As a result, six of these members were subject to a tax charge.

Mr Webb said applying this average across all public sector pensions schemes could mean hundreds of workers taking ill-health early retirement face tax charges of this nature each year.

In a guide published on its website the Greater Manchester Pension Fund warns its members they may be subject to a “significant growth” in the value of their pension in the year they retire as a result of an “ill health enhancement”.

To discuss this with an adviser, contact us on 0191 384 1008.