Page last updated – 5th March 2023
Equity Release and Benefits: What You Need to Know
Equity release can be an attractive option for older homeowners looking to access the value of their property to supplement their income or pay for expenses in retirement.
However, many people are understandably concerned about the potential impact of equity release on their entitlement to benefits.
In this guide, we’ll explore the relationship between equity release and benefits, and offer strategies for protecting your entitlement while still accessing the value of your home.
If you want to learn more about equity release and how it works, we’ve put together a comprehensive guide on the topic. Our guide covers the different types of equity release, eligibility requirements, and more. It’s a great starting point if you’re considering equity release as an option to supplement your retirement income.
What are Benefits?
Benefits are government payments designed to provide financial assistance to individuals or families who need it.
Pension Credit
Pension Credit is a means-tested benefit for individuals over the age of 65 with a low income. It is made up of two parts: Guarantee Credit and Savings Credit. Guarantee Credit provides a minimum level of income for those who are eligible, while Savings Credit provides additional income for those who have saved for retirement. The amount of Pension Credit an individual can receive depends on their income and assets, including any pensions, savings, and investments.
According to the UK government, 1,376,000 people claimed Pension Credit in August 2022, and the benefit provides an average of £65 per week per household. It is important to note that releasing equity from your home can affect your eligibility for Pension Credit, as it is means-tested based on income and assets.
Council Tax Reduction
Council Tax Reduction is a benefit that helps individuals on a low income to pay their council tax. The amount of Council Tax Reduction an individual can receive depends on their income, savings, and other factors such as the number of people in their household.
According to the UK government, around 5.5 million households in England received Council Tax Reduction in 2020-21. It is important to note that releasing equity from your home can affect your eligibility for Council Tax Reduction, as it is means-tested based on income and assets.
Housing Benefit
Housing Benefit is a means-tested benefit that helps individuals with their rent payments. The amount of Housing Benefit an individual can receive depends on their income, savings, and other factors such as the number of people in their household and the size of their home.
According to the UK government, around 3.6 million households in England received Housing Benefit in 2020-21. It is important to note that releasing equity from your home can affect your eligibility for Housing Benefit, as it is means-tested based on income and assets.
Universal Credit
Universal Credit is a means-tested benefit for individuals and families on a low income or out of work. It is designed to replace six existing benefits, including Housing Benefit and Working Tax Credit. The amount of Universal Credit an individual can receive depends on their income, savings, and other factors such as the number of people in their household and whether they have any disabilities.
According to the UK government, around 6 million people were claiming Universal Credit as of May 2021. It is important to note that releasing equity from your home can affect your eligibility for Universal Credit, as it is means-tested based on income and assets.
It is crucial to seek professional advice before considering equity release if you are currently receiving any of these benefits, as releasing equity can impact your eligibility and the amount you receive.
Looking to release equity from your property but not sure where to start? Our equity release calculator can help. With just a few simple inputs, you can quickly calculate how much equity you could release and explore the different options available to you.
Equity Release and Means-Testing
When it comes to means-tested benefits, the amount you receive is based on your income and assets. Equity release can impact your eligibility for these benefits because it increases your assets. Prior to equity release, the value of your property may have been disregarded when calculating your assets for means-testing purposes. However, once you release equity from your property, the value of your property is no longer disregarded and is considered an asset.
For example, let’s say you receive pension credit and own a home worth £200,000. The value of your home is currently disregarded for pension credit purposes. However, if you release £50,000 of equity from your home, the value of your property is now considered an asset and can potentially impact your eligibility for pension credit.
The impact on means-tested benefits will depend on the specific benefit and the amount of equity released.
For example, if you receive pension credit, the amount you are entitled to may be affected by the amount of equity you release from your home. Pension credit is means-tested based on income and savings. If you release a large amount of equity, it could be considered an asset and potentially reduce your eligibility for pension credit.
Similarly, if you receive a council tax reduction, the value of your property after equity release could affect your entitlement to this benefit. Council tax reduction is also means-tested and takes into account a person’s income, savings, and assets. If the value of your property increases after equity release, it could reduce your entitlement to council tax reduction.
Not all benefits are means-tested and some may not be affected by equity release. For example, universal credit is not means-tested based on assets and would not be affected by equity release.
It’s important to understand the potential impact of equity release on means-tested benefits and to seek professional advice to determine the best course of action. There may be strategies to protect your eligibility for benefits, such as releasing equity in smaller amounts over time or using certain equity release products that have less impact on means-testing. It’s important to weigh the pros and cons of these strategies and make an informed decision.
Different equity release products can have varying impacts on eligibility for benefits. For example, taking out a lump sum lifetime mortgage may impact eligibility more than a drawdown lifetime mortgage, which allows the homeowner to release funds in smaller amounts over time.
Protecting Benefits
If you are considering equity release but are also reliant on means-tested benefits, there are strategies you can use to protect your entitlement. One option is to release equity in smaller amounts over time, rather than taking out a lump sum. This can help to minimize the impact on means-testing and preserve your entitlement to benefits.
Another option is to consider equity release products that are specifically designed to protect your benefits entitlement. For example, some providers offer “protected plans” that guarantee a minimum percentage of the property value to be left as inheritance, which can help to maintain eligibility for means-tested benefits.
Looking for the top equity release providers? Look no further than our page on the best equity release providers. We’ve done the research for you and have information on all the Equity Release Council member companies. Whether you’re looking for a lump sum or a drawdown plan, our page has everything you need to find the right provider for your needs.
Case Study
Let’s consider a hypothetical scenario. John is a retired homeowner who is considering equity release to help pay for home renovations and supplement his income. He currently receives pension credit and is concerned that equity release may reduce or eliminate his entitlement.
After consulting with a financial adviser, John decides to take out a drawdown lifetime mortgage, which allows him to release funds in smaller amounts over time. This strategy helps to minimize the impact on his pension credit entitlement while still allowing him to access the value of his home.
Conclusion
Equity release can be a valuable tool for older homeowners, but it’s important to consider the potential impact on benefits entitlement.
By understanding the relationship between equity release and means-tested benefits, and exploring strategies for protecting your entitlement, you can make an informed decision about whether equity release is right for you.