How Does Equity Release Affect Benefits? Complete Analysis
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How does equity release affect benefits? This is one of the most searched questions related to equity release on the internet. If you’ve been asking this question, you should be proud of the level of scrutiny you’re applying to equity release plans and their wider consequences.
Below we have revisited what releasing equity from your home in later life involves, including full details on lifetime mortgages and home reversion schemes. Then we get to the meat of the question by answering how benefits can be affected by equity release – with fine detail. Let’s get started.
What is equity release?
Equity release is used by senior homeowners to access some of the money in their property without having to make repayments. They can receive either a lump sum or a drawdown facility, which is only paid back when their property is sold. They continue living in their home and are never forced to sell up, unless they move into long-term care. If the last surviving homeowner never needs to go into aged care, they will repay their debt from their estate, which will include the sale of the property unless estate beneficiaries decide to pay off the debt and keep the property.
Only consider an equity release company that is authorised and regulated by the Financial Conduct Authority. And preferably one that is a member of the Equity Release Council.
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Equity release in detail
A lifetime mortgage is the most common method of equity release in the UK. This is when you release a percentage of your property’s equity and pay a fixed interest rate on the amount taken out. This interest rolls up, so rather than paying it off it continues to grow and add to the total debt. You can usually make voluntary interest repayments to reduce the total debt if you want to reduce the total debt owed when you move into care or die.
There are also enhanced lifetime mortgages. These work in the same way as described above but account for your medical history to potentially allow you to release more equity. In a nutshell, if your life expectancy is lower, you could release a larger lump sum.
The lesser common method of equity release for seniors is a home reversion plan. Companies offering these offer you a loan for a percentage of your property sale proceeds in the future. But the percentage they want in the future is likely to be more than double the amount they give you today. They don’t usually charge interest, however.
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.
By spending the money, gifting it away or donating it legitimately, you may be able to reduce your savings and continue to receive your benefit payments.
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:
- The money is paid as a tax-free lump sum loan or drawdown facility, meaning you don’t need to pay income or Capital Gains Tax (CGT) on the payment(s).
- You can use the money on anything you wish, from home improvements to worldwide trips. Or simply to make retirement easier and more enjoyable.
- When you have a lifetime mortgage from a lender that is a member of the Equity Release Council, they agree to the negative equity guarantee. This means you can never owe more than the market value of your home, and more specifically, what it sells for.
- You continue to live in your home without paying rent and cannot be forced out for any normal reason.
- 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?
Using an equity release scheme will not affect your entitlement to the fixed state pension. However, the state pension has additional payments that are means-tested (pension credit) and can be affected by releasing equity.
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:
- Pension credit (made up of Guarantee Credit and Savings Credit)
- Council tax reduction
- Universal Credit (replacing housing benefit, employment and support allowance, jobseeker’s allowance, income support and more)
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.
Your eligibility to receive full pension credit payments is affected by how much you have tucked away in savings. At the time of writing, anybody with £10,000 or less in savings will receive a full top-up amount. But anybody with savings above £10,000 will see their pension credit payments reduced. For every £500 in savings above £10,000, the pension credit payment is reduced by £1.
So, if you take out equity release and have savings above £10,000 – which is highly likely – then your pension credit payments will be reduced or even removed.
This then has an effect on your council tax reduction eligibility – read on.
How does equity release affect council tax reduction?
Some people in the UK receive a Council Tax reduction based on their income. If you pay a reduced council tax rate and neither you nor your partner receives pension credit, then having savings above £16,000 will make you no longer eligible to receive the council tax reduction. However, if either you or your partner still receive pension credit payments, your council tax reduction will not be affected.
Take note of the rules mentioned in the section above. If your new savings makes you not eligible for pension credit payments, then you will not be eligible for a council tax reduction with over £16,000 in savings.
It should also be said that each local authority can apply its own savings threshold. Even though many choose £16,000, they may make it lower or higher depending on where you live.
How does equity release affect Universal Credit?
Universal Credit has replaced a number of other benefits, including employment and support allowance, housing benefit, jobseeker’s allowance and others. Nobody is entitled to universal credit payments if they have savings in excess of £16,000. Thus, your entitlement to Universal Credit will be affected by taking out equity that pushes your savings above this threshold.
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.
Be aware of “deprivation of assets” fraud
“Deprivation of assets” is a type of fraud where someone will hide their assets in order to continue receiving means-tested benefits. For example, you might receive £30,000 from a type of equity release plan and then give £20,000 to a family member to hold for you so you can continue to claim universal credit, pension credits, and by extension a council tax reduction. This is fraud and a serious crime.
This doesn’t mean you can’t give away money to loved ones, as long as it is genuine. Making home improvements and spending the money genuinely is one way to reduce your savings and continue receiving a means-tested benefit.
Can I release equity with poor credit?
You can still use equity release if you have poor credit. Unlike other loans, your personal finances and credit score are not assessed to take out a lifetime mortgage or home reversion plan. The equity release company is only interested in your property and how easy or difficult it will be to sell in the future.
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.