Our expert answers:
The latest statistics from SHIP (Safe Home Income Plans) show a marked increase in the number of homeowners using equity release products to unlock the capital in their homes. In the last quarter of 2011, we saw the highest level of equity release cash advances for two years.
With more people in and approaching retirement realising that the size of their pension pot falls short of their expectations, many are turning to their property.
How accessing the money in a property will impact upon any state benefits being received is one of the key considerations for potential equity release clients.
When means-tested state benefits are calculated, the recipient’s income, such as savings, stocks and shares, is taken into account, but the value of or capital locked up in a property is not.
Anyone currently entitled to benefits such as pension credit or council tax benefit will need to assess thoroughly what the impact will be.
In the case of clients receiving pension credit, savings are taken into account when assessing whether an applicant is eligible.
Where the intended recipient of pension credit is under 75 years old, The Pension Service may have set an assessed income period (AIP). Once the AIP has come to an end, if the recipient has accessed the money locked in their home through downsizing or equity release, they would have to report the change in their financial circumstances and would therefore need to be reassessed.
If a recipient of a pension credit has less than £10,000 in capital when he or she comes to be reassessed, they will qualify for the same benefit that they were receiving.
Therefore, if a client intends to spend the bulk of the equity they release before they are due to be reassessed, they will be unaffected.
For any clients that do not have an agreed AIP, they will need to inform The Pension Service of the change in their finances immediately.
Council tax benefit has an upper capital limit, which currently stands at £16,000, so if the amount your client releases pushes their capital above £16,000, they would no longer be eligible.
In fact, if an increase in savings results in a client losing their pension credit, their council tax benefit is automatically cancelled, so your client would need to make a new application to the local authority if they are still eligible.
One way of mitigating the impact of releasing equity on state benefits is to use a drawdown equity release plan.
This allows people to access smaller sums of money as and when needed, rather than taking it in one lump sum, which can mean it stays below the benefits cap on savings.
However, many clients may find that, while equity release may result in them losing their benefits, accessing the capital in their property leaves them financially better off.
Releasing the equity locked in a property can be life changing and there are many flexible and innovative products on the market to help people lead the retirement they dreamt of, so advice is of course essential.
