Does Equity Release Affect Benefits and State Pensions?
Last updated 28th October 2021
5 min read
We’re often asked about how equity release can affect your state benefits. Some types of means-tested benefits can be reduced or removed if you keep a portion of your tax-free lump sum as savings and this pushes you over the relevant savings threshold.
This guide offers a close look at equity release and state benefits eligibility. Along the way, we’ll consider the types of benefits that can be affected, the impact of how you use the money, and the effect on state pensions.
Although benefits are a consideration when it comes to equity release, there are several other important factors to take into account as part of your decision-making process – read our post on the pros and cons of equity release to learn more.
Equity release and state benefit eligibility
To determine whether or not you’re eligible for means-tested benefits, the Government checks your income and savings. When you release equity from your home, you receive a tax-free lump sum. Should you decide to keep some of this money, this could push your total savings above the maximum threshold for certain types of state benefits.
The first £6,000 of savings will not affect your eligibility for means-tested benefits (rising to £10,000 if you are in a care home). The maximum threshold for state benefits in the UK is £16,000 – if your savings exceed this amount, you will not be eligible.
An income of £1 a week is assumed for every additional £250 in savings between the lower and upper limits, reducing the amount of benefits you receive. Visit the Government’s ‘How savings can affect benefits’ guide for more information.
Which benefits can be affected by equity release?
A range of different means-tested state benefits can be affected if your equity release money increases your savings above the threshold, including:
- Income Support;
- Income-Based Jobseeker’s Allowance;
- Income-Related Employment and Support Allowance;
- Housing Benefit;
- Council Tax Reduction;
- Universal Credit;
- Pension Credit (more on this below).
It’s worth noting that Income Support, Income-Based Jobseeker’s Allowance, Income-Related Employment and Support Allowance, and Housing Benefit have all now been replaced with Universal Credit. Those who receive these benefits have until 2024 to switch over – visit the Citizens Advice post on ‘Moving to Universal Credit from other benefits’ to learn how.
Which benefits are not affected by equity release?
Any state benefit that is not means-tested won’t be affected by equity release.
Disability-related benefits are paid regardless of income and savings, so are unaffected if you decide to release equity – this includes Attendance Allowance, Personal Independence Payment (PIP), and its predecessor, Disability Living Allowance (DLA).
Similarly, the Winter Fuel Payment, free NHS prescriptions, free eye tests are available to everyone who is over 60 and receiving a State Pension. As such, your eligibility for these benefits won’t be changed by equity release.
What counts as savings for means-tested benefits?
When calculating your savings to determine your eligibility for means-tested benefits, the Government looks at the money you have available as well as certain types of investment that you could sell. The following types of savings are considered:
- Money in your bank, building society, and National Savings accounts;
- Any funds you have in a Tax-Free Childcare account;
- Any owned property (excluding your home);
- Premium and Income Bonds;
- Stocks and shares.
To work out how much an asset is considered to be worth, take its current market value and subtract any debt secured against it. If it would cost you money to sell the asset – i.e. if you were to sell a house – then you can also subtract 10% from the market value. Equally, you can take off the cost of any currency conversion charges if you convert foreign savings into pounds.
If you own any savings jointly with someone else, your share of the asset is considered to be 50%. You cannot give away assets in order to reduce your savings below the threshold (this is known as ‘notional capital’ and will still be counted as part of your savings). However, you can use savings to pay off debts.
Which types of savings are excluded from means-tested benefits?
Some types of assets are excluded when your savings are assessed for means-tested benefits. The following will not be counted towards your total savings:
- Life insurance policies and pre-paid funeral plans;
- The value of a pension fund that you are not currently accessing;
- Business assets;
- Personal possessions like cars, furniture, and jewellery;
Whilst these are the most common exemptions, this is not an exhaustive list. Visit the entitledto.co.uk ‘Savings rules in working age benefits’ guide for more information.
What if the equity release money is being used to pay off a mortgage or loans?
If you use the equity release money to pay off your mortgage or a loan, then it will not affect your eligibility for state benefits. In this scenario, the equity release lump sum is transferred directly to the mortgage or loan provider and never enters your bank account. As a result, the money is not classed as savings and will not push you over the means-tested savings threshold.
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Does equity release affect State Pensions?
Your eligibility for a State Pension will not be affected by equity release as this is not a means-tested benefit – equally, private pensions are not impacted.
However, if you claim Pension Credit, the Guarantee Credit part may be affected by releasing equity on your home. Guarantee Credit is designed to top up your weekly income as a pensioner:
- If you’re single, your weekly income will be topped up to £177.10;
- If you live with a partner, your joint weekly income will be topped up to £270.30.
The amount of Guarantee Credit you receive is affected by how much your weekly income needs topping up and your savings. You will receive the full top-up amount if your savings are less than £10,000. For every £500 in additional savings above this threshold, you will be considered to have a ‘deemed income’ of £1 a week and this amount will be subtracted from the top-up you receive. There is no upper limit to the amount of savings you can have.
For example, if you were single and had a weekly income of £167.10, this would be topped up by £10 to a total of £177.10 per week. However, if you also had £10,500 in savings, you would be treated as having a deemed income of £1 a week – as a result, your weekly income would only be topped up by £9 to £176.10 a week.
Any money that you decide to keep from your equity release lump sum will be classed as savings and could result in you receiving less Guarantee Credit if your savings go over the £10,000 threshold.
Now that you understand how equity release can affect your benefits and Pension Credit, you may want to learn more about how the process of releasing equity works. For more information, you can visit our equity release page or read some of our other guides:
Alternatively, call us on 0800 633 5566 for a free consultation or request a call back below.