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How does equity release affect benefits and state pensions?

Last updated 25th March 2024
5 min read

Equity release can affect some types of means-tested state benefits, including State Pensions. This happens if you save enough of your tax-free lump sum to push you over the relevant threshold. Currently, you must have £16,000 or less in money, savings, and investments.

This guide offers a close look at equity release and state benefits eligibility. It explains the types of state benefits that can be affected by equity release. It also looks at the effect of equity release on state pensions.

Benefits are a consideration when it comes to equity release. But there are other important factors to consider before you make a decision. Read our post on the pros and cons of equity release to learn more.

 

Equity release and state benefit eligibility

The government checks your income and savings to see if you're eligible for means-tested benefits. When you release equity from your home, you receive a tax-free lump sum. If you keep some of this money, it 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. This rises to £10,000 if you're in a care home.

The maximum threshold for state benefits in the UK is £16,000. If your savings exceed this amount, you won't be eligible.

An income of £1 a week is assumed for every £250 extra in savings between the lower and upper limits. This is known as 'tariff income', and reduces the amount of benefits you get. For Universal Credit, £4.35 is assumed for every £250 of capital. This is known as ‘assumed monthly income’.

Visit the government’s How savings can affect benefits(commonslibrary.parliament.uk opens in a new tab) guide for more information.

How does equity release affect means-tested state benefits?

A range of means-tested state benefits can be affected if equity release money raises your savings above the threshold. This can include:

  • 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)

Important: Universal Credit has replaced Income Support, Income-based Jobseeker’s Allowance, Income-related Employment and Support Allowance, and Housing Benefit. If you receive these benefits, you have until 2029 to switch over. Visit Moving to Universal Credit from other benefits(www.citizensadvice.org.uk opens in a new tab) to learn how.

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Does equity release affect State Pensions?

Your eligibility for a State Pension will not be affected by equity release. This is because it isn't a means-tested benefit. Private pensions are also not impacted.

But if you claim Pension Credit, releasing equity could affect the Guarantee Credit. This is designed to top up your weekly income as a pensioner:

  • If you’re single, Guarantee Credit tops up your weekly income to £201.05
  • If you live with a partner, it tops up your joint weekly income to £306.85

The amount of Guarantee Credit you receive depends on how much your weekly income needs topping up, plus your savings.

You'll receive the full top-up amount if your savings are less than £10,000. For every £500 in extra savings above this threshold, you'll lose £1 a week in Guarantee Credit. (There's no upper limit to the amount of savings you can have.)

For example, if you were single and had a weekly income of £167, this would be topped up by £10 to a total of £177 per week. But if you also had £10,500 in savings, your weekly income would only be topped up by £9 to £176 a week.

Any money that you decide to keep from your equity release lump sum will be classed as savings. This could mean you receive less Guarantee Credit if your savings go over the £10,000 threshold.

Which state benefits are not affected by equity release?

Any state benefit that isn't means-tested won’t be affected by equity release.

Some disability-related benefits are paid regardless of income and savings. So they are unaffected if you decide to release equity.

This includes Personal Independence Payment (PIP)(www.gov.uk opens in a new tab), Attendance Allowance(www.gov.uk opens in a new tab) (if you've reached state pension age) and its predecessor, Disability Living Allowance (DLA)(www.gov.uk opens in a new tab). In Scotland, it also includes the Adult Disability Payment(www.mygov.scot opens in a new tab).

Free NHS prescriptions and free eye tests are also available to over 60s receiving a State Pension. So your eligibility for these benefits won’t be changed by equity release.

What counts as savings for means-tested benefits?

The government considers a few things when looking at your eligibility for means-tested benefits. These include the money you have, as well as certain types of investments you could sell:

  • Money in your bank, building society, and National Savings accounts
  • Any funds you have in a tax-free childcare account
  • Cash
  • Any owned property (excluding your home)
  • Premium and income bonds
  • Stocks and shares

To work out how much an asset is 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 50%.

You can't give away assets to reduce your savings below the threshold. (This is known as ‘notional capital’ and will still be counted as part of your savings.) But 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 aren't currently accessing
  • Business assets
  • Personal possessions like cars, furniture, and jewellery

These are the most common exemptions, but this isn't an exhaustive list. Visit Savings rules in working age benefits (www.entitledto.co.uk opens in a new tab) for more information.

What if the equity release money is being used to pay off a mortgage or loans?

If you use the equity you release to pay off your mortgage or a loan, it won't affect your eligibility for state benefits.

In this scenario, the equity release sum goes directly to the mortgage or loan provider. So it never enters your bank account. As a result, the money isn't classed as savings, and it won't push you over the means-tested savings threshold.

Next steps

Want to learn more about how equity release works? You can visit our equity release page or read our other guides for more information:

More about equity release 

The thoughts and opinions expressed in the page are those of the authors, intended to be informative, and do not necessarily reflect the official policy or position of SunLife. See our Terms of Use for more info.