Ensure Means Tested Benefits Are Not Sacrificed When Taking Out a Lifetime Mortgage
September 25th, 2013A lifetime mortgage is a type of equity release plan wherein you can access the equity tied up into the home without selling the house or moving out. It is like a regular residential mortgage but is designed for over 55’s with no fixed term, so could potentially go on until the end of life, or until the client moves into permanent care, or if the house is sold earlier for some other reason.
There are two types of lifetime mortgages – roll up mortgages which involve no monthly payments and the interest is simply added to the loan amount, and interest only lifetime mortgages which involve making monthly interest repayments. You can release the equity in the form of instalments or as a tax free lump sum. Releasing equity from your property is a way to add to your income during retirement and as such, could impact on any means tested state benefits you may be entitled to.
Means tested benefits work on the basis of cut offs or thresholds in order to assess eligibility. By releasing equity from your home, you essentially add to your savings or monthly income, and depending on the regulations could impact on your eligibility to receive certain benefits. It is therefore important to examine all the potential consequences of equity release including the potential impact on means tested benefits like pension credit.
At the moment the regulations regarding pension credit are that if savings exceed £10,000, then for every £500 over this limit there is a loss of £1 per week in benefits. Based on your current savings and the amount you wish to release, it is possible to work out how it could affect pension credit.
Another state benefit that could be impacted by equity release is council tax benefit. Council tax is a means tested benefit, and the state has similar thresholds to determine eligibility. Like pension credit, council tax benefit could also be potentially affected by releasing equity from your property. The limit for savings for council tax is usually £16,000. It is important to check for any assessment income periods, whereby no notifications need to be made to the relevant authorities even if there should be an increase in savings.
The best way to circumnavigate the potential loss of benefits is to only release the amount that you need, and which will be spent immediately. This way the money does not reflect on your savings and therefore cannot impact on state benefits. Flexible equity release plans like drawdown schemes offer a way to release equity in instalments or on a drip basis, such that the amount can be released to coincide with benefit limits.
