Can Equity Release Loans Impact Your Pension Credit?

Equity release schemes are a popular way of unlocking the value tied up in your home to help make retirement more comfortable.

You could access a large lump sum, tax free, that you can then spend as you see fit – whether that’s improving your home or just using the money to supplement your pension income.

Does Equity Release Impact a Means-Tested Pension Credit?

If you receive means-tested Pension Credit, a lump sum through equity release can push you over the £10,000 personal savings limit that would see the amount of credit given drop. Equity release doesn't affect the standard state pension.

While Equity Release doesn’t impact your standard state pension, it can mean you lose out on the means-tested Pension Credit benefit, so you need to check if it’s right for you.

However, it could mean you lose out on some means tested benefits including Pension Credit.

Read on to find out more.

Looking for other information on Equity Release? This guide has info on ' Does equity release affect my pension credit?' We have also writen extensively about:

• - Are equity release schemes are regulated by FCA?
• - Who is equity release good for?
• - Who are members of the equity release council?
• - Why is equity release tax free?
• - Will equity release be affected by brexit?

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What Is Pension Credit?

When you reach the State Pension age, everyone in the UK that has paid National Insurance contributions for at least 10 years is entitled to draw a State Pension. The full amount for the new State Pension is £175.20 per week, but to qualify for this you’ll need to have made National Insurance contributions for 35 years.

For the old State Pension, which applies to any man born before 6^th April 1951 and any woman born before 6^th April 1953, the maximum State Pension is £134.25.

Pension Credit is a means-tested benefit that can top up your state pension by up to almost £40 if you’re on the old state pension. It can top up a single person’s state pension to £173.75 per week, or £265.20 for couples.

Why Does Equity Release Impact Pension Credit?

When you apply for Pension Credit your financial circumstances are taken into account and your total income is assessed. The idea of Pension Credit is to ensure that you’re taking home at least £173.75 per week as an individual, or £265.20 as a couple, from all of your income sources.

Savings are therefore included since they can reasonably be expected to be put towards your income. You’re allowed a £10,000 limit for savings before your Pension Credit is affected, and then for every £500 over that limit it is treated as an extra £1 of income per week – reasonably, this means that £500 of savings spread over weekly payments is expected to last you almost 10 years.

The above is a simplified example that doesn’t take into account other income you might have, but it gives an idea of how your savings can impact your weekly income.

So, when you apply for equity release, you need to balance how that will impact your State Pension and other income. Your financial adviser is obligated to make this clear to you when you do apply, so that you understand the implications of taking out the loan, but you need to be sure you wrap your head around the long-term impact. It may mean you only wish to take a smaller amount if you choose a drawdown lifetime mortgage.

Or you may wish to ringfence part of your equity for your estate, guaranteeing you receive a lower amount so that your savings don’t push you over the limit for Pension Credit. Or, you may just decide that the large cash lump sum is worth more to you than the extra weekly income.

When Does Equity Release Not Count As Savings?

There are certain situations where you could take a large cash lump sum and spend part of that money, and it would not count towards your savings assets so therefore would not impact your Pension Credit.

The first of these is paying off debt. If you need to repay your mortgage or you have other unsecured debts that you want to clear, equity release could help you wipe those from your budget. This could be a sensible plan since it allows you to not only bring down your outgoings but also retain the right to claim Pension Credit if the amount you’re left with once debts are cleared is below the thresholds.

Equity Release: Improve Your Home

Another option is to use the money to improve your home. Home renovations are looked upon kindly by the government as it helps to protect long-term assets. That’s why there are also local authority grants available in some circumstances to make sure your home is well maintained. You should always explore these grants before taking equity release but, if you aren’t eligible, then an equity release loan could be used to carry out essential upgrades to your property without impacting your right to Pension Credit.

Finally, you also have the right to buy a car in retirement if you need one, since it’s likely you will need transport to buy shopping, attend appointments and so on. If you take equity release and use the lump sum to buy a reasonably priced car then you won’t have to worry about it impacting your savings limit if you also want to claim Pension Credit.

However, these are the only main reasons you would be permitted to take equity release and then spend it, in order to avoid losing out on Pension Credit. If you did take out equity release but then give the money away to family, or spend it on other items such as a holiday or other personal assets that are non-essential, you could be undergoing ‘deprivation of assets’ which is fraud, and a criminal offence. You could be forced to repay any Pension Credit paid out to you, and you may also be fined.

How to know whether equity release is right for you

A key part of any equity release application is that you can only apply for it when you seek financial advice. You can choose to decline advice but you must make it clear. It’s highly recommended that you take advice since any licensed and regulated adviser will look at every aspect of your finances and give you a list of personalised solutions.

This includes whether equity release would have an impact on your means-tested benefits including Pension Credit, and it also covers the intended purpose of your equity release loan – so they can help you make sure you aren’t committing fraud if you plan to use the lump sum in a certain way.

Make sure that when you do decide to apply for equity release that you are upfront about any plans you have for retirement and that you use a registered adviser with the Equity Release Council.

They follow strict guidelines that ensures your advice considers your full circumstances and how you wish to live during retirement so that you are presented with the best options that may or may not include equity release.

Your health will also play a part as this will impact your life expectancy. The longer you live, the more likely that a higher weekly income that’s guaranteed could be more beneficial to you than savings which could be used up.

But then depending on your plans for those savings, and the size of the equity release loan value you could be eligible for, it might instead make more sense to release the equity tied up in your home and use that to boost your weekly income instead.

In Summary

Equity release loans can be a fantastic boost to your finances during retirement, but they can have a knock-on effect on your pension credit, depending on your circumstances.

Ultimately, the advice you are given at the start of your application should make it clearer and you can use this to make your decision on whether to apply.

How Can Money Savings Advice Help You With Releasing Equity?

Here at Money Savings Advice, we have partnered with some of the UK’s leading Equity Release brokers. They have already helped thousands of people get the best Equity Release deal and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.