The prospect of a tax free lump sum to spend and the right to live in the home you love, sounds appealing but have you ever considered how equity release could affect your entitlement to benefits?
Despite, or perhaps even because of Covid-19, 10,351 new equity release plans were agreed in quarter 3 of 2020, as reported by Key.
And though the number remained 9% down year-on-year from 11,419 in Q3 2019, it’s clear that there is still a large appetite for equity release.
With so many homeowners seeking advice, we’ve created this Q&A equity release guide to explain how this type of borrowing can affect eligibility for means-tested benefits but if you’d like additional information, see “Is equity release safe?”
Can equity release affect eligibility for state benefits?
If the value of your home is higher than the remaining debt, if any, on your mortgage, you may have considered taking out equity release as a way of accessing the cash built up in your property.
However, taking out equity release can affect your entitlement to certain means-tested benefits, like Pension Credit or Social Fund, although that often depends on how much you decide to release.
There are lots of pros and cons to be considered and the effect on your entitlement to means-tested benefits like pension credit is certainly something to ponder.
Why does equity release affect means-tested benefits?
If your equity release payments were added to your capital or included as your annual income, it could take you over the threshold for the benefit you’re applying for, restricting your entitlement or removing it altogether.
Depending on your circumstances, a decision to take out equity release and wave your entitlement to means-tested benefits could seriously impact your future financial situation, so it could be helpful to seek financial advice as well as guidance from an equity release mortgage broker.
What benefits can be affected by equity release?
- Income-based Jobseeker’s Allowance
- Income-related Employment and Support Allowance
- Income Support
- Pension Credit
- Tax Credits (Child Tax Credit and Working Tax Credit)
- Housing Benefit
- Council Tax Support
- Social Fund (Sure Start Maternity Grant, Funeral Payment, Cold Weather Payment)
- Universal Credit
However, it’s also worth noting that benefits that do not require means testing, such as disability benefits or contributory benefits, are not affected by equity release.
State pension entitlements are also exempt from any effect if you were to take out equity release, though independent financial advice should be sought before making such a decision.
How does equity release affect pension credit?
According to research from Ageuk.org, nearly 9 out of 10 claims for Pension Credit are successful with 2.5 million households across the UK receiving it.
Pension Credit is an income-related benefit and even if you own a home, you may still be eligible for the payments, though you can check your eligibility using the Government Pension Credit calculator.
Pension Credit is made up of 2 parts:
Guarantee Credit tops up your weekly income if it’s below £173.75 (for single people) or £265.20 (for couples).
Savings Credit is an extra payment for people who saved some money towards their retirement, for example a pension.
It's only available to people who reached State Pension age before 6 April 2016 but if you’re eligible, you could get up to £13.97 extra per week if you're single or £15.62 if you're a couple.
There are also other benefits to accessing pension credit:
- You might not have to pay Council Tax (unless other people live with you).
- The BBC will provide a free TV license to those receiving Pension Credit from 2020
- You’ll get free NHS dental treatment
- You might be able to claim help towards the cost of glasses and travel to hospital
- You’ll get a Cold Weather Payment of £25 when the temperature is 0°C or below for 7 days in a row.
- If you’re a homeowner, you might be eligible for help with mortgage interest, ground rent or service charges
- If you’re a carer, you may get an extra amount known as Carer Premium, or Carer Addition if it’s paid with Pension Credit and this can be worth up to £36.85 a week.
How does equity release affect council tax support?
Councils across the UK each have their own rules about what makes a member of their district eligible for council tax relief or help, so look at your local councils’ website for information about their income thresholds.
Some councils provide council tax relief to pensioners with low incomes and less than £16,000 in savings, so if your income from equity release payments is included as part of your annual income or savings, you could miss out.
Can equity release affect the amount of funding I could receive for care?
Yes, depending on your financial situation and choice of equity release lender, you may find that there are financial implications which could affect the type of care you can afford in the future.
There are lots of variations of equity release agreements, each with their own terms and conditions, rates and repayment terms.
If you were to choose an option which allowed you to roll up interest payments until the end of the agreement, which would be either when you pass away or move into full time care, your choice of care provider could be impacted by the cost of those interest payments.
Can I use equity release to fund my care?
Lots of people dislike the idea of moving out of their home and prefer to remain in their property as long as possible, often with the help of a carer.
However, the NHS report that the average cost of a carer is £20 an hour, which can quickly add up if you’re planning on self-funding your own social care.
To fund their future social needs, some homeowners are turning to home reversion schemes, which are a type of equity release product.
Most agreements allow you to sell all or a share of your property in return for a tax-free lump sum, a regular income, or both if you decide. This money can then be used how you see fit, either for a more comfortable retirement or to fund your care.
If I fund my social care with equity release will my home be sold for less than it’s worth?
The good news? You could live in your home with access to the cash needed to pay for your care.
The bad news? Your property won’t be officially sold until after your death or when you move into full time care (if that were to happen.)
This presents a risk to the home reversion lender as they’re taking a risk on house prices. If they were to plummet, they might not get all the money back that they paid out to you.
To alleviate this risk, generally speaking, properties sold under home reversion agreements are sold at less than the market value, though this isn’t always the case.
State benefit entitlement vs equity release: Next steps
- Check your eligibility for benefits using the Governments’ benefit eligibility calculators
- Seek advice from an equity release expert who can:
- Check your eligibility for equity release
- Compare the options available to you to find the best deal
- Calculate how different variations of equity release amounts could affect your entitlement
- Discuss the pros and cons of agreements to find you a solution that’s right for you, whether that be equity release or not
Equity release in 2021
David Burrowes, Chairman of the Equity Release Council, commented on the recent Q3 2020 equity release market monitor report stating;
“Equity release is a carefully considered choice, and this year’s unprecedented events make it more important than ever for people to weigh up their decisions.
Looking ahead, the key market drivers remain in place: people are living longer and retirement finances are increasingly squeezed.
Many older households are already facing a situation where their expenses outweigh their disposable income, which makes access to property wealth an important pillar to support later life living standards.”
Where can I go for advice about equity release and state benefits?
Coronavirus has impacted the finances of many homeowners and it’s understandable that so many are turning to the equity in their properties to boost their retirement fund, pay off their mortgage or help a loved one financially.
In fact, £963m of property wealth was unlocked during Q3 of 2020 by new or returning equity release customers, up by a staggering 38% from Q2 in the same year.
The right advice can affect the interest rate you pay for your equity release agreement which is why our advisors compare the numerous deals and take the advice they provide with great consideration.
If you want to know more about equity release, get in touch and we’ll have an expert get you the information you need concerning benefit entitlement and other areas that you wish to discuss.