Does equity release affect my state benefits?

Equity release involves unlocking value from your property, resulting in a capital sum that is paid to you. If you receive means-tested state benefits—those calculated based on your income and savings—this new capital could potentially reduce or entirely stop your payments. Understanding the rules governing capital thresholds, particularly for benefits like Pension Credit and Universal Credit, is essential before committing to an equity release plan. Specialist financial advice is always necessary to ensure you manage the funds in a way that aligns with your overall financial needs without jeopardising vital state support.

Does Equity Release Affect My State Benefits? Understanding Capital Limits

The decision to proceed with equity release is significant, offering homeowners aged 55 and over the opportunity to access wealth tied up in their property. While this can provide financial flexibility, it is crucial to understand the implications of receiving a large sum of money, especially concerning ongoing state benefits.

The core issue lies in how the Department for Work and Pensions (DWP) classifies the funds received from an equity release plan. Whether taken as a lump sum or in stages via a drawdown facility, these funds are treated as capital, which directly impacts eligibility for means-tested support.

The Core Answer: Means-Tested vs. Non-Means-Tested Benefits

To determine if your equity release plan will affect your state benefits, you must first distinguish between the two main categories of benefits provided in the UK: means-tested and non-means-tested.

Non-means-tested benefits are paid regardless of how much income, savings, or capital you have. These benefits are based on specific needs, contributions (like National Insurance), or circumstances, not financial necessity.

Means-tested benefits are calculated based on your ability to support yourself. If your capital (savings, investments, and cash from equity release) exceeds certain statutory limits, your entitlement to these benefits will be reduced or removed.

Benefits That Are Affected (Means-Tested)

If you receive any of the following benefits, receiving a substantial lump sum from equity release could impact your payments:

• Universal Credit (UC): This is the main benefit for working-age individuals and families, replacing several older ‘legacy’ benefits. UC is highly sensitive to capital.
• Pension Credit (Guarantee and Savings Credit): This tops up the income of pensioners. It is severely affected by capital holdings.
• Housing Benefit: Although being phased out by Universal Credit for most working-age people, it remains available for some pensioners and is means-tested.
• Council Tax Support (or Reduction): Provided by local authorities, this is means-tested and usually follows DWP rules regarding capital limits.
• Income Support, Jobseeker’s Allowance (Income-Based), and Employment and Support Allowance (Income-Related): These legacy benefits are highly sensitive to capital.

Benefits That Are Not Affected (Non-Means-Tested)

If you primarily rely on the following benefits, receiving equity release funds should not impact your eligibility or payment level:

• New State Pension: This is based on your National Insurance contributions record.
• Attendance Allowance (AA): Paid if you need help looking after yourself due to illness or disability.
• Personal Independence Payment (PIP): Paid to people who have long-term ill-health or a disability.
• Disability Living Allowance (DLA): The previous benefit for disabled people, still paid to some adults and children.
• Carer’s Allowance: Paid to those who spend a minimum amount of time caring for someone who receives certain disability benefits.

It is crucial to note that while the payment of the non-means-tested benefit itself is protected, the total amount of income received might indirectly affect other secondary benefits (like certain local grants or discounts) that use total household income as a criterion.

How Equity Release Proceeds Are Treated as Capital

When you take out a lifetime mortgage or a home reversion plan, the funds you receive become part of your capital. The DWP defines capital very broadly, including savings held in bank accounts, investments, stocks and shares, and cash.

If you choose a lump sum equity release plan, the full amount is immediately counted as capital from the moment it enters your bank account. If you choose a drawdown facility, only the money you actively withdraw and keep as savings will count towards the capital limit.

Understanding the Capital Thresholds

The DWP uses different capital thresholds depending on the specific benefit you claim. If your total capital exceeds these thresholds, your benefits will be impacted.

1. The Upper Capital Limit (Pension Credit)

For Pension Credit and certain other legacy benefits (like Housing Benefit for pensioners), the critical upper limit is currently £16,000. If your total capital exceeds this amount, you will typically lose entitlement to Pension Credit and associated benefits completely.

Between £10,000 and £16,000, Pension Credit uses a tariff income system. For every £500 (or part thereof) above the £10,000 limit, the DWP assumes you receive £1 of income per week. This ‘tariff income’ reduces the amount of Pension Credit you receive, even if you are not actually generating that income from your savings.

2. The Upper Capital Limit (Universal Credit)

Universal Credit operates under a stricter system. The upper capital limit is currently £16,000. If your capital exceeds this threshold, you are not entitled to receive Universal Credit.

Between £6,000 and £16,000, Universal Credit also uses a tariff income system. For every £250 (or part thereof) above the £6,000 limit, the DWP assumes you receive £4.35 of income per month. This assumed income reduces your UC payment.

Because the rules are complex and often reviewed, it is highly recommended that anyone considering equity release while claiming means-tested benefits consult an independent financial adviser (IFA) or benefit specialist immediately to calculate the exact risk.

The Importance of Deprivation of Capital Rules

A crucial rule the DWP enforces is known as ‘deprivation of capital.’ This rule prevents individuals from deliberately giving away or spending large sums of money specifically to qualify for means-tested benefits.

If you receive a large equity release lump sum and immediately spend it on items or gifts that the DWP deems non-essential—such as buying a luxury car, giving money to family members, or making significant, unusual donations—the DWP may investigate.

If they conclude that the main purpose of the spending was to reduce your capital below the threshold to claim or increase benefits, they can calculate your entitlement as if you still held the money. This is called ‘notional capital’ and can result in severe financial penalties and overpayment recovery.

However, spending the money on necessary items is usually fine. Acceptable uses typically include:

• Paying off outstanding debts (mortgages, loans, credit cards).
• Essential property repairs and maintenance.
• Buying necessary adaptations for your home due to disability or age.
• Purchasing essential goods or services.

Strategies to Protect Your Benefits After Equity Release

The primary way to mitigate the risk of losing means-tested benefits is to carefully manage the timing and amount of the funds you receive.

1. Utilising a Drawdown Lifetime Mortgage

If you require capital but are concerned about exceeding benefit thresholds, a drawdown lifetime mortgage is often the preferred solution.

Unlike a traditional lump sum mortgage, a drawdown facility allows you to take an initial, smaller amount of cash, and then leave the remainder of the facility available in a cash reserve, which is typically interest-free until you withdraw it. Crucially, the undrawn reserve does not count towards your capital limit.

You only withdraw funds as and when they are needed for specific purposes (e.g., paying a sudden repair bill). This minimises the period during which you hold large amounts of cash, helping you stay below the benefit capital thresholds.

Benefits of Drawdown:

• You only accrue interest on the amount you withdraw, meaning the debt grows slower.
• It keeps your held capital low, protecting means-tested benefits.
• It provides a flexible safety net for future needs.

2. Spending the Funds Quickly and Appropriately

If you take a lump sum, or if you withdraw a substantial amount via drawdown, you typically have a ‘grace period’ of 52 weeks (under Universal Credit rules) or sometimes shorter periods under legacy benefits, where the funds intended for specific purchases (such as house repairs or the purchase of a new property) are temporarily disregarded. However, you must prove the funds are genuinely earmarked for specific, necessary purchases.

If you know you have large, immediate expenditures planned, such as paying off an existing mortgage or financing necessary home improvements, spending the equity release proceeds on these costs immediately will reduce your capital quickly, often before the DWP reassesses your benefit claim.

Always keep detailed receipts and documentation demonstrating how the funds were spent. This is your defence against any accusation of deliberate deprivation of capital.

3. Reviewing Your Entire Financial Situation

Before proceeding, it is vital to perform a comprehensive financial review. Sometimes, the potential loss of benefits can outweigh the benefit of receiving the equity release funds.

For example, if you receive a high level of Pension Credit, which unlocks other valuable perks (such as eligibility for cold weather payments, TV licence discounts, or free NHS prescriptions), losing Pension Credit due to accumulated capital could leave you significantly worse off overall.

A regulated equity release adviser will be required to explain these risks to you and ensure you seek independent legal advice. They often work in conjunction with specialist benefit advisers to provide a holistic view.

We encourage clients to fully understand their financial standing, including any existing debts and income sources. A clear overview helps ensure that equity release is a benefit, not a detriment.

If you are unsure about your credit file status, which providers often check before approving large financial products, you can get a detailed view here: Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

Seeking Expert Advice is Crucial

Due to the complexity and constantly changing nature of benefit rules, relying on general information is risky. Equity release is a highly regulated product, and UK regulatory requirements ensure that you must receive professional, impartial advice before completing a plan. This advice must cover the specific implications for your state benefits.

You should consult:

• A Regulated Equity Release Adviser: They will explain the product terms, costs (including compound interest), and ensure the plan meets your needs.
• A Specialist Benefits Adviser (e.g., Citizens Advice or Age UK): These organisations can provide highly detailed, free guidance on how capital affects your specific combination of state benefits.

Remember that equity release involves securing a loan against your home (in the case of a lifetime mortgage). Interest accumulates over time, significantly increasing the debt. Although the interest is usually rolled up and only paid upon death or moving into long-term care, the fundamental financial decision must be treated with caution. Always ensure that the plan includes the “No Negative Equity Guarantee,” meaning you will never owe more than your property is worth.

For detailed, up-to-date information on how capital affects specific means-tested benefits in the UK, refer to official government resources, such as the Department for Work and Pensions (DWP).

People also asked

Can I still get Pension Credit if I take out a drawdown lifetime mortgage?

Yes, you typically can, provided the funds you have actively drawn down and are holding as savings remain below the Pension Credit lower capital limit of £10,000. The undrawn reserve facility within the lifetime mortgage does not count as capital for benefit assessment purposes.

What happens if my capital temporarily goes over the limit after equity release?

If your capital exceeds the limit for a means-tested benefit (like Universal Credit or Pension Credit), your benefit payments will be reduced or stopped immediately. The DWP expects you to report changes in capital promptly. If the money is spent quickly on necessary items, and your capital drops back below the threshold, you must notify the DWP to reinstate or increase your benefit entitlement.

If I use equity release to pay off my existing mortgage, does that affect my benefits?

Using equity release funds to repay an existing secured debt, such as a mortgage, is generally considered an appropriate use of capital and is unlikely to be classified as ‘deprivation of capital.’ Since the funds immediately leave your possession to pay a genuine debt, your liquid capital remains unchanged or only slightly increased, thus protecting your means-tested benefits.

Do I have to tell the DWP I am getting equity release funds?

Yes. If you receive means-tested benefits, you have a legal obligation to inform the DWP of any change in circumstances, including receiving a lump sum of capital, as soon as possible. Failure to report a change could result in an overpayment of benefits which you would have to pay back, potentially facing fines or prosecution.

Does interest roll-up on my lifetime mortgage count as income for benefits?

No, the interest that rolls up on a lifetime mortgage debt is not treated as income for the purpose of means-tested benefits. It is a debt accruing against the property, not a financial gain or income stream. The only element that affects benefits is the actual cash capital you receive and retain.

If I gift the money to my children, will that save my benefits?

Gifting large sums of money from equity release proceeds to family members is highly likely to be viewed by the DWP as ‘deliberate deprivation of capital’ if the primary motivation is to maintain benefit entitlement. The DWP can investigate backdating several years and treat the gifted money as ‘notional capital’ still belonging to you, resulting in the loss of benefits.

Equity release can be a valuable tool for providing retirement income or funding major expenses. However, for those reliant on means-tested state benefits, the decision carries significant complexity. Always prioritise professional, tailored financial and benefit advice to navigate these limits successfully and ensure that accessing your property wealth does not compromise your essential state support.