Equity release can help retirees meeting everyday living costs such as heating bills…
As an independent equity release adviser I’ve been asked many questions over the years about means tested benefits and how clients fear that that by taking equity release these benefits could be reduced; or even worse, withdrawn.
I wonder therefore, how many retired homeowners that are in receipt of state benefits have feared to enquire about releasing cash from their homes, and therefore had similar notions?
This article aims to explain the relationship between equity release schemes & means tested benefits and how they can happily live side-by-side and function collectively.
Joint income households may feel safe in the fact that they can maintain their standard of living based on current pension income. But, how many of you would qualify for benefits if your income reduced by half?
What if you are already in receipt of means tested benefits and you have no emergency funds?
We have evidenced recently how winters are getting colder & there are greater extremes of Mother Nature. Boilers seem to breakdown when we least need it. Utility bills are increasing at rates much higher than inflation & certainly more than state pensions! In fact, anything could happen within the realm of the household appliances that maybe needs fixing, plumbing, servicing or maintaining.
To get into the nitty gritty of pension credit rules would be an exuberant task, and quite honestly, my fingers would ache with all the typing, but I can certainly cover the basics for you. How many people would even be aware of what the pension credit thresholds are?
Well let’s have a look at some figures…
The current basic rate for the standard pension guarantee credit in 2013/14 tax year is a minimum of £145.40 for a single person and £222.05 for couples. This means that if your total pension income is lower than these amounts, you may be eligible for a “top-up” under guarantee pension credit rules. Also if over the age of 65 additional credits may be available so always check.
Well, you are allowed up to £10,000.00 in savings before your guaranteed credit starts to be affected. If your savings exceed this limit, depending upon how much more, will determine the reduction, even elimination of means test benefits such as pension credit.
As a general rule, for every £500 over the £10,000 threshold, your pension credit can be reduced by £1 per week. Therefore, substantial amounts beyond the threshold would eventually result in the withdrawal of this state benefit. Care must therefore be exercised.
There are current guidelines under what is known as an ‘Assessed Income Period’. This is normally given for 5 years once Pension Credit has been granted but there are rules that apply with age or couples and could be less. It means that if your circumstances change within the time allotted, you would normally not need to advise the Department of Work & Pensions (DWP) of this.
This is just the tip of the iceberg and to ensure that you get the most out of your entitlement rights, you would need to speak directly to the Department of Work and Pensions to get fully assessed.
So, how does this tie in with releasing equity, and how do you ensure that your entitlements would not be affected?
Let’s have a look at an example:
Mrs T lives in a 2-bedroom terraced house which she feels is worth approximately £125,000.00. She is 67 years of age and has been in receipt of Pension Guarantee Credit for the last 2 years. Mrs T currently has £2,000 in savings but wishes to keep this for emergency use. The property is in need of re-decoration and she would like to refurbish the bathroom. Mrs T has not had a holiday for the last 5 years and so this is something she would like to do, but not in the immediate future as the priority is the house. She has heard of equity release but fears the roll-up of interest may affect her grandchildren’s inheritance.
For all the work to be done, Mrs T has had a quote for £8,500.00 but doesn’t have the capital to pay for it herself.
She approached me for advice and recommendation on how she could achieve her aspirations, but also to discuss her concerns regarding the Pension Credit she currently was in receipt of.
After a full review of Mrs T’s current financial situation and researching the whole of the equity release marketplace for all the plans available, it was an Aviva Flexible drawdown lifetime mortgage plan would be the most suitable option for her and this could be achieved without affecting her current Pension Credit.
Based on Mrs T’s current age of 67 and her property value of £125,000, an initial lump sum of £10,000.00 could be offered at a fixed interest rate of 5.78%. This amount would also incorporate the costs of setting up the Aviva equity release plan. Mrs T would then have a remaining cash reserve of £20,000 which she could drawdown in minimum amounts of just £2,000 in the future. This would suit her requirements in advance of whenever she requires smaller ad-hoc cash payments on expenditures such as a holiday or additional work around the house.
The benefits for Mrs T would be that she only pays interest on the amount she has actually withdrawn form the lifetime mortgage. There would be NO interest charged on the £20,000 left in the cash reserve facility as this is still being held by Aviva until the monies are required in the future.
By completing the application as a drawdown plan, the amount of interest accruing would be a lot less than if the full amount had been taken as a capital lump sum from day one. Additionally, as the full £10,000 is being utilised immediately, the Pension Credit would not be affected the remaining balance on deposit would leave her with savings over the pension credit threshold. The remaining cash reserve stays with the Aviva until such time as Mrs T elects to take a further release of equity from her £20,000 reserve.
This is just one example of many possible scenarios. Every client and their circumstances are different based on their age, health personal requirements & attitude to risk. Being an independent equity release adviser helps me to source the whole marketplace to find the best equity release deals & terms for each personal individually. My training, experience, being authorised by the FCA & abiding by the core principles of the Equity Release Council, leads me to offering equity release solutions to people all over the UK.
Hopefully, this article has provided more insight and clarity into the fact that you can be in receipt of benefits and still have the potential to release equity. In doing so I have helped Mrs T achieve her four main objectives with the Aviva drawdown lifetime mortgage recommendation: –
1. To raise sufficient funds to carry out her home improvements
2. To have the ability to call on further funds at short notice for a holiday in the near future
3. To keep within the pension credit limits so not to lose any potential state benefits
4. To restrict the roll-up and compounding of equity release interest by taking the funds in smaller chunks rather than one larger lump sum
Likewise, I would like to be able to provide guidance & advice to many more retirees in search of fulfilling their retirement dreams and in the most prudent way possible.
For further information and a free, no obligation quotation, please contact support on 0800 028 3142 and by emailing [email protected]Back