Can equity release affect your pension income?

Can equity release affect your pension income?

Written in line with our editorial policy.

Taking out an equity release plan won’t typically have an impact on income you receive from a private or State pension. However, there may be circumstances when it affects other types of income in retirement, such as Pension Credit.

As the population ages, retirees are increasingly seeking ways to unlock the equity tied up in their homes. Many need to supplement their pension income to support their retirement lifestyle. One popular option is an equity release scheme. These allow homeowners to borrow against the value of their property without having to sell it. 

Equity release plans can provide much-needed finance in retirement. But they do come with potential implications that require careful thought. This article looks at the following issues around the impact of equity release on your retirement income:

• What is equity release?
• Does equity release affect your State Pension?
• Does equity release affect other income you may receive from the State?
• Does equity release affect your private pension income?
• Does equity release affect your income from savings or investments?
• The importance of advice when considering equity release.

For more information and advice from our selected advisers,  you can call us on 0808 178 3055, or request a call back and we’ll be happy to help further. Alternatively, check your eligibility and get an initial indication of how much tax-free cash you could release.

What is equity release?

Equity release plans allow homeowners aged 55+ to access the equity tied up in their property without having to move home. The two types of equity release are lifetime mortgages and home reversion plans.

For retirees with a shortfall in your income, equity release can be an appealing way to unlock wealth from your property. It may improve your quality of life, meet unforeseen expenses, and let you enjoy the fruits of your investment in your home.

Pension plans may not always provide retirees with enough income to maintain their desired standard of living. For those without substantial savings or sufficient income, equity release can fill the gap. There are of course pitfalls of equity release, and one of them is a potential impact on other income. 

Does equity release affect your State pension?

The simple answer to this question is ‘no’ – the UK State Pension is not means tested. Although not everyone gets the same amount, how much you get depends on your National Insurance record, and not on your wealth. Therefore, no matter how much money you release, your State Benefit entitlement is not affected.

Does equity release affect other income you may receive from the State?

Although the State Pension isn’t means-tested, some benefits often received by retirees are. This means that the released equity could impact your eligibility for some benefits. As benefits are often vital sources of additional income for retirees, this can be of serious concern.

Income or a lump sum from equity release could affect your eligibility for means-tested benefits. These include Pension Credit that provides extra money to help with your living costs if you’re over State Pension age and on a low income. 

If you receive Pension Credit it may mean you can get further help, too. Additional benefits may include a Council Tax Discount, a free TV licence (if you are 75 or older) and help with some NHS treatment costs.

In addition, eligibility for local authority or NHS funding for homecare is typically means tested. A financial assessment will see how much the individual can afford to pay towards their care.

If you receive any of these benefits or may become eligible in the future, please bear in mind the potential impact of equity release. Taking out a plan could potentially lead to reduced or withdrawn entitlements.

Does equity release affect your private pension income?

As with the State Pension, equity release will not affect any income you receive from a private pension. Whether you receive an annuity, money from a final salary pension scheme or have pension savings in flexi-access drawdown, equity release won’t have an impact.

However, there are circumstances where you may wish to seek professional pensions advice to help ensure you make the most financially-sound choice. An example might be where you have money in flexi-access drawdown and are considering using equity release for additional income.

Does equity release affect your income from savings or investments?

Equity release money is tax-free when you take it initially. However, any interest or investment return you earn on it is liable to tax rules. It is therefore generally recommended that you DO NOT take out equity release in order to put money into savings or investments such as stocks and shares. 

In fact, equity release providers typically do not allow you to invest the money you release in stocks and shares. This is because with a lifetime mortgage, the most popular form of equity release, interest accrues on a compound basis. This is likely to be at a rate higher than what you could realistically gain from savings interest or investment returns. 

The importance of advice when considering equity release

A lifetime mortgage or home reversion plan can offer a lifeline to retirees seeking to supplement their pension income. However, the decision to take equity release should be made with careful consideration of its impact on means-tested benefits, as well as any tax implications.

A financial advisor or a specialist equity release adviser can assess your individual situation. They can help you understand the potential effects on other parts of your income. They will also help you explore alternative options to meet your financial needs without compromising your entitlement to other income. 

Our selected equity release advisers are of course available to discuss your circumstances and offer further information and advice. Just call us on 0808 178 3055 or request a call back and we’ll arrange a no-obligation appointment for you. Alternatively, check your eligibility and get an initial indication of how much tax-free cash you could release.

About Richard Groom. A writer with 20+ years’ experience across several sectors including financial services, Richard has a passion for writing clear and simple content on even the most complex of subjects. In his spare time, Richard loves exploring the hills and mountains of the UK on long walks with his faithful cocker spaniel. Follow Richard on LinkedIn