Before you decide to take out equity release, you should be aware of how it can affect your state benefits, such as pension credit, council tax support, universal credit, housing benefit and disability benefits. 

Tapping into your home's equity might sound tempting, but beware: without thorough research, this move could backfire, leaving you in a trickier financial spot than before.

Leveraging in-depth research by our BankingTimes expert team, this article navigates the intricate ways various benefits could be affected. 

It offers a comprehensive analysis of the subtleties at play and presents strategic insights to adeptly navigate and prepare for these potential shifts.

Let us get started.

How Does Equity Release Impact My State Benefits in the UK?

Equity release can impact your state benefits in the UK in several ways.

Firstly, it may increase your income or savings, potentially affecting means-tested benefits.

These can include Income Support, Pension Credit, Council Tax Reduction, or Housing Benefit.

Secondly, releasing equity from your home doesn't automatically disqualify you from receiving these benefits. But, it could affect the amount you receive.

It's crucial to seek guidance from a financial adviser or the Benefits Agency before proceeding with equity release to understand the specific impacts on your state benefits.

Can Equity Release Change Your Entitlement for Benefits?

One thing all plans have in common is that they can affect your eligibility for certain state benefits, especially those that are means-tested. 

This is because releasing equity increases your accessible funds, which can affect your perceived financial need.

Impact on Savings and Capital

Releasing equity may lead to an increase in your savings and overall capital, which could subsequently alter your eligibility for certain benefits. 

Many of these benefits are tailored for individuals with lower financial reserves.

Therefore, a boost in your financial assets from equity release might result in surpassing the qualifying thresholds, potentially disqualifying you from receiving these benefits.

Means-Tested Benefit Limits

The limits for savings and capital vary depending on the type of benefit you are claiming. 

If equity release pushes your assets above these limits, you could see a reduction or complete loss of these benefits. 

Let us take a closer look at some of these limits: 

• Pension Credit: The limit is £10,000. Savings above this reduce pension credit by £1 for every £500 over the limit.¹
• Council Tax Support: Typically, the limit is £16,000, but this can vary based on your local authority.²
• Universal Credit: The limit is £16,000 for both single and joint claimants.³
• Housing Benefit: Generally, the limit is £16,000, but it can be higher for those over state pension age receiving guarantee credit part of pension credit.⁴

It is crucial to understand these limits and how close your current assets are to them before considering equity release.

Will Pension Credits Be Affected?

Pension Credits, which provide additional income in retirement, are particularly sensitive to changes in your financial status, including any income or capital from equity release.

Keeping Pension Credits Post-Equity

To maintain eligibility for Pension Credits after releasing equity, it is important to ensure that your total capital stays below the upper limit of £10,000. 

This requires careful planning and possibly spending or investing the released equity in a way that does not significantly increase your countable assets.

Ways to achieve this may include: 

• Paying off debts
• Buying essential items
• Making home improvements 
• Giving gifts to relatives

Bear in mind that you may be required to show evidence of how you spent the money. 

You should always seek advice from a specialist equity release advisor to ascertain the impact it will have on your benefits.

Capital Limits Unpacked

The capital limit for pension credit is £10,000, which means that for every £500 you have above this amount, your pension credit will be reduced by £1 a week. 

For example, if you have £11,000 in savings and capital, your pension credit will be reduced by £2 a week. 

However

Some types of capital are ignored when calculating your pension credit, such as the value of your home, personal possessions, life insurance policies, and pre-paid funeral plans.

You should always declare all your savings and capital to the Department for Work and Pensions (DWP)⁵ when you claim pension credit, as failing to do so could result in overpayments, penalties or prosecution.

What Happens to Universal Credit?

Universal credit is a means-tested benefit that replaces six other benefits. 

These are: 

• Income support
• Income-based jobseeker’s allowance
• Income-related employment and support allowance
• Housing benefit
• Child tax credit 
• Working tax credit

It is paid monthly and the amount you receive depends on your income, savings, capital, family circumstances and housing costs. 

Universal credit is available to people who are on a low income, out of work, or unable to work due to illness or disability.

Equity's Effect on Universal Credit

If you release equity and receive Universal Credit, the impact depends on the released amount and its use. 

Keeping the lump sum as savings could reduce your credit if it exceeds £6,000, with a £4.35 reduction for every £250 above this.⁶ 

Holding over £16,000 disqualifies you from universal credit altogether. 

However, spending the sum on debts, essentials, or home improvements may not affect your credit, provided you can show evidence of how you spent the money.

It is vital to consult an equity release adviser for tailored advice on your situation.

Managing Universal Credit Increases

If you are considering equity release and are currently receiving Universal Credit, it is advisable to consult with a financial advisor. 

They can help you understand how releasing equity might impact your benefit and advise on ways to manage your capital effectively.

How Are Council Tax Support and Equity Release Linked?

Council tax support is a means-tested benefit that helps you pay your council tax bill if you are on a low income. 

It is administered by your local authority and the amount you receive depends on your income, savings, capital, family circumstances and the council tax band of your property. 

Will Your Council Tax Support Decrease?

If the released equity increases your capital above your local council's limit for Council Tax Support, you could see a decrease in the support you receive, or it might be stopped altogether.

What Is the Council Tax Support Capital Limit?

The limit varies depending on your local authority, but it is usually £16,000. 

Some types of capital are ignored when calculating your council tax support, such as the value of your home, personal possessions, life insurance policies and pre-paid funeral plans. 

It is important to check the specific limit for your area.

Housing Benefit Risks

Accessing the money tied up in your home can also pose risks to your Housing Benefit, which is crucial for many retirees in covering their rent costs.

Equity Release's Housing Benefit Peril

If the amount release increases your savings above the Housing Benefit threshold, you risk losing this vital support.

This can be particularly concerning for retirees who rely on thie benefit to help with housing costs.

Understanding Savings Thresholds

The threshold is £16,000 for most people, but it can be higher if you or your partner are over state pension age and receive the Guarantee Credit part of Pension Credit.⁷

Will Disability Benefits Be Impacted?

Yes, disability benefits can be impacted by equity release, but it varies by type. 

Benefits like Employment and Support Allowance and Carer’s Allowance are means-tested, depending on your income and assets, and may be affected. 

However, non-means-tested benefits, including Attendance Allowance, Personal Independence Payment, and Disability Living Allowance, are not influenced by your financial status.

How Does Equity Release Affect Disability Benefits?

If you receive means-tested disability benefits, an increase in your capital due to equity release could affect the amount of support you receive. 

This is because these benefits are calculated based on your income and savings.

What Are the Criteria for Means-Tested Disability Support?

The criteria for means-tested disability support in the UK typically include the following factors:

• Income: This encompasses all earnings from employment, pensions, other benefits, and any income from investments or other sources.
• Savings and Capital: This refers to any money you have in bank accounts, investments, property, or other assets. The value of these assets is considered in determining your eligibility.
• Family Circumstances: This includes whether you have a partner, children, or other dependents. The income and capital of a partner, for instance, can also be taken into account.
• Housing Costs: Expenses related to your living situation, such as rent, mortgage payments, service charges, and other housing-related costs, are considered.
• Other Personal Circumstances: This can include your age, health condition, and any specific needs related to your disability.

Each means-tested disability benefit may have its own specific set of criteria and thresholds for income and capital. 

It is important to check the specific requirements for each benefit, which can be found on the GOV.UK website or by contacting the Department for Work and Pensions (DWP) or your local authority.

How Does the DWP Treat Equity Release?

The DWP is the government department responsible for administering most of the benefits in the UK, such as pension credit, universal credit, employment and support allowance and disability benefits. 

It has rules and regulations on how it treats equity release and how it affects your benefits.

What Counts as Deprivation of Assets?

Deprivation of assets is when you deliberately reduce your income or capital to increase your entitlement to benefits or to avoid paying care fees. 

For example

If you give away a large sum of money to your relatives or spend it on non-essential items, the DWP may consider this as deprivation of assets and treat you as if you still have the money when calculating your benefits. 

This could result in a reduction or cancellation of your benefits, as well as a possible penalty or prosecution. 

How to Declare Equity Release to the DWP?

It is essential to promptly declare any released equity to the DWP and your local authority, as it can affect your benefits. 

Declarations can be made online, by phone, or post, and should include details like the type and amount of equity released, its usage, and its impact on your income and capital. 

Supporting documents such as bank statements and contracts are also necessary. 

Failure to declare can lead to incorrect benefit payments, requiring you to repay overpayments or receive backdated amounts, and may result in penalties or fraud charges.

Are Children's Inheritance and Benefits Connected?

Yes, children's inheritance and their benefits can be connected, particularly in the context of equity release. 

Releasing equity can lower the value of your estate, especially your home, thereby diminishing the inheritance your heirs might receive. 

This reduction could significantly impact their financial situation and may affect their eligibility for certain income and asset-dependent benefits.

Will Equity Release Reduce Your Heirs' Inheritance?

Yes, it reduces your home's value by the amount borrowed, along with the accumulated interest and fees. 

This reduction affects the remaining value of your estate, potentially decreasing the inheritance for your heirs after the property is sold, either upon your passing or if you move into long-term care.

The extent of this impact depends on the type of plan and the amount owed.

However, certain schemes offer safeguards for heirs' inheritance, such as: 

• A no-negative-equity guarantee, which caps the debt at your home's value
• Inheritance protection to reserve a home value portion for heirs
• A drawdown facility to minimise interest by borrowing in smaller increments

It is crucial to consult a specialist equity release advisor to select the most suitable option for your and your heirs' needs.

Can Inheritance Affect Benefit Eligibility?

If your heirs receive a significant inheritance, this can impact their eligibility for means-tested benefits. 

A larger inheritance can increase their capital, potentially affecting their benefit claims.

Common Questions

Conclusion

Equity release offers a practical solution for accessing the wealth tied up in your home, but it can also impact your eligibility for means-tested state benefits. 

Before proceeding, it is essential to consult a specialist adviser to understand the best options for your situation and to keep authorities informed about any financial changes. 

This decision not only affects you but also your heirs in terms of inheritance and benefits. 

Given its complexity, seeking professional advice is crucial, especially to determine whether equity release will affect your benefits.