How Does Equity Release Affect Benefits? Complete Analysis

"Are you curious about how equity release might affect your benefits? This can be a tricky topic, but you're in the perfect place to learn more.

In this article, we’ll explore:

• The meaning of equity release.
• How to obtain a fair quote.
• The pros and cons of equity release.
• The impact of equity release on benefits such as pension credit, council tax reduction, and universal credit.
• The benefits that remain unaffected by equity release.

Equity release can be a confusing process. It’s normal to feel unsure or worried about how it might change your benefits. We understand your concerns and are here to offer clear, easy-to-understand advice.

Our goal is to help you make informed decisions about your financial future. So, let’s start exploring how equity release could affect your benefits.”

What benefits might you lose by taking equity release? (Quick Answer)

Taking out an (enhanced) lifetime mortgage or home reversion plan will increase the amount of money you have saved. By increasing your savings, you may no longer be eligible for some means-tested benefits, such as Pension Credit, Universal Credit or even council tax reductions.

Spending or gifting money does not automatically preserve benefits. Deprivation-of-capital rules may treat you as still owning funds if reducing capital to obtain or increase benefits was a relevant purpose; obtain advice before acting.

Keep reading to uncover the specifics and finer details, including the savings thresholds for different UK benefits. 

What are the advantages of equity release?

The pros of using equity release plans are:

1. A lifetime-mortgage advance is borrowed capital rather than taxable income. Home reversion is a property sale; later income, gains and gifts can have separate tax consequences.
2. Permitted use depends on provider terms. Benefits and tax consequences must be assessed before spending or gifting.
3. For a plan meeting the relevant Equity Release Council standards, the right to remain depends on keeping the property as your main residence and meeting the contract terms. A no-negative-equity guarantee limits repayment to the net sale proceeds when its conditions are met; it does not stop the balance growing or make the product risk-free.
4. You may remain while satisfying the plan’s occupancy, payment, insurance and maintenance terms.
5. In rare circumstances, it can even rescue inheritance tax for your loved ones. But this is a complicated strategy with a degree of risk. 

What are the disadvantages of equity release?

The main drawback of using lifetime mortgages or home reversion schemes is that they are costly. The interest rate offered through the former may be quite low, but over the course of a decade or longer, the amount owed can more than double. And home reversion plans usually significantly undervalued the real property value to mitigate lending risk. 

This means you pass on much less through inheritance than you otherwise would. If your beneficiaries are not financially secure themselves, it makes the decision to release equity even more difficult. 

Can you release equity if you receive benefits?

You can release equity if you receive state benefits, but doing so may affect your eligibility to continue receiving them or to receive them in the future.

We have the details below. 

Does equity release have an effect on state benefits?

Taking out equity release can have an effect on your entitlement to some state benefits. It may cause you to no longer be eligible at all for some, or it may reduce the amount you can claim. However, other state benefits will not be affected by equity release. 

The types of benefits that might be affected by equity release are means-tested benefits. These are the benefits that use your income or savings to determine how much money you are entitled to. Benefits that are not means-tested will not be affected. 

Will equity release reduce my state pension?

The State Pension is not means-tested and amounts differ between people. Pension Credit is a separate means-tested benefit and can be affected by capital. See related guidance.

What means-tested benefits are affected by equity release?

The list of means-tested benefits that may be affected by equity release, depending on your personal situation, are:

1. Pension credit (made up of Guarantee Credit and Savings Credit)
2. Council tax reduction
3. Universal Credit, Housing Benefit and other income-related support where applicable; contributory or new-style ESA and JSA are different and are not all replaced by Universal Credit.

How does equity release affect means-tested benefits?

To make it easy to understand how equity release can affect your entitlement to means-tested benefits, we’ve addressed each of the above in detail here: 

How does equity release affect pension credits?

Pension credits are a type of top-up payment to the state pension for people on low incomes, possibly because without a private pension, the state pension is their only form of income. Receiving pension credits can lead to other benefits too, such as council tax reductions and cold weather payments. 

Savings of £10,000 or less are normally ignored for Pension Credit, but entitlement still depends on income and other circumstances. Above £10,000, each £500 or part generally counts as £1 weekly income.

Released funds retained as capital can reduce Pension Credit, depending on applicable disregards and the full assessment.

This then has an effect on your council tax reduction eligibility – read on. 

How does equity release affect council tax reduction?

Council Tax Reduction depends on the UK nation, age and local scheme. Receiving Guarantee Credit can affect the capital rules; Savings Credit alone is not the same exemption. Ask the council for an assessment.

If Pension Credit changes, report it and ask the council to reassess linked support. Do not assume every award ends automatically.

Working-age local schemes and pension-age rules differ. Check the actual applicable scheme rather than a universal £16,000 rule.

How does equity release affect Universal Credit?

Universal Credit normally has a £16,000 upper capital limit and a reduction for capital above £6,000, subject to disregards and other rules. It has not replaced all contributory ESA/JSA or every Housing Benefit claim.

What benefits are not affected by equity release?

Only a means-tested benefit can be affected by taking out a lifetime mortgage or home reversion plan. If you received a benefit that does not take into account your income or savings, then this will not be affected. 

Understand deprivation-of-capital rules

If you reduce or transfer capital to obtain or increase means-tested benefits, it may still be counted as notional capital. Concealing savings or giving false information can also be fraud, but deprivation is not automatically a criminal offence in every case.

A genuine gift can still be deprivation if benefit entitlement was a relevant purpose. Reasonable spending and debt repayment have specific rules, which differ between benefits; seek advice and keep evidence.

Can I release equity with poor credit?

Poor credit does not automatically rule out every lifetime mortgage, but lenders set credit criteria and may require some debts to be repaid. An IVA, bankruptcy, judgment or other credit issue can restrict eligibility; acceptance is not guaranteed. Products with required payments also involve affordability checks. See related guidance.

What are the pitfalls of equity release?

The pitfalls of equity release are not understanding fully what you’re agreeing to. This is why it is essential that you get an equity release adviser to talk you through your options and all the nuances of the deal in detail. 

For example, not many people will have considered how if you use equity release this could affect benefit payments. Similarly, you may not have considered how it will affect future plans to downsize or what it could mean for your loved ones and inheritance tax. Only choose independent financial advice by a company or professional that is authorised and regulated by the Financial Conduct Authority. 

New guides on equity release and state benefits!

Avoid those pitfalls by learning more about this topic and others at MoneyNerd. We have over 100 equity release guides and explanation posts to help any UK homeowner considering this method of releasing equity. And make sure to seek financial advice before making a decision.