Does equity release affect benefits?

This content was reviewed and approved by Andy Gray.

In this guide, we explore both how equity release can impact your state benefit eligibility, but also the scenarios where is doesn’t; helping fully inform you on what can be a confusing topic.

Different ways in which equity release funds can be used

There are three common ways in which equity can be released regardless of the plan type (see below). The option you choose could influence whether your state benefits are affected.

• The equity released goes directly to a 3^rd party, for example a mortgage lender, to clear an existing mortgage.

• The equity is released to purchase a property.

• The equity released is paid into your bank either in regular instalments or as a single lump sum.

In scenarios one and two, your benefits would not directly be affected as the funds are paid to a third party. However, in terms of scenario one, reducing debt means more money may accumulate in your bank account over time, which could eventually affect benefits.

In contrast, in scenario three, the equity released is paid into your bank account and will immediately be factored in as part of the means-testing process, which could affect the benefits that you qualify for (depending on whether you meet the relevant threshold).

There are two main types of equity release: lifetime mortgages and home reversion plans.

• Lifetime mortgage - a type of equity release where a loan is secured against your home, allowing you to release tax-free cash without needing to move.

• Home reversion plan – a type of equity release where you sell either part or all your home to a provider for a tax-free lump sum or regular income. (At LV=, we don’t currently offer advice on home reversion plans.)

Types of state benefits which could be impacted by equity release

Certain UK benefits are means-tested, meaning they are only available to those with an income below a set threshold, and releasing equity from your home could increase your income above this limit, making you ineligible.

Impacted means tested benefits could include:

• income support
• income-based jobseeker’s allowance
• income-related employment and support allowance
• housing benefit
• council tax reduction (more on this below)
• universal credit (more on this below)
• pension credit (more on this below)

Universal Credit

Universal credit is a state benefit that supports working-age people on low income or out of work by combining several benefits into one single monthly payment. As a means-tested benefit, universal credit could be affected by equity release.

If your savings are below £6,000 after releasing equity, your entitlement to universal credit remains unaffected. However, if you have savings between £6,001 - £16,000, your claim will be affected, (check your government entitlement). The upper threshold is £16,000, and if your savings exceed this figure, you’ll be ineligible to receive any Universal Credit.

Council Tax reduction

Council tax reduction is a state benefit that helps those on low incomes reduce their Council Tax bills, with eligibility and discount amounts based on income, savings, house size, and local council rules. As a means-tested benefit, council tax reduction could also be affected by equity release.

If you have a low income, you may qualify for a reduced council tax bill, but the amount of help you receive depends on where you live. Typically, pensioners who have under £16,000 in savings, will qualify for council tax reductions.

If you’re still in employment, the relevant local authority will set their own threshold, which is typically £16,000 or lower. If releasing equity results in your savings exceeding £16,000, you’ll likely lose your entitlement to this benefit.

Pension Credit & equity release

As both state and private pensions are not means tested, your eligibility won’t be impacted by equity release. However, whilst pensions are not affected, your Pension Credit benefit could be.

Pension Credit is a means-tested benefit which tops up the State Pension (to £227.10 for a single person and £346.60 for a couple) for those in need to help with living costs.

The savings allowance threshold here is £10,000 before it will affect your eligibility for Pension Credit. Funds kept from an equity release lump sum will be classed as savings. This means that you’ll receive less Pension Credit if your savings exceed the £10,000 threshold.

Lastly, you must also have reached State Pension age (currently 66 for both men and women, but due to increase to 67 between 2026-2028) and be living in the UK to qualify for Pension Credit.

Which state benefits are not affected by equity release?

Equity release generally doesn’t affect state benefits that are not means-tested. For example, the State Pension is unaffected because it’s available to everyone who reaches 66 years, regardless of income or savings. Private pensions also remain unchanged by equity release.

Disability benefits that don’t depend on income or savings continue as normal after equity release. These include Personal Independence Payment (PIP), Attendance Allowance (for those over State Pension age), and Disability Living Allowance (DLA). In Scotland, the Adult Disability Payment is also unaffected. Additionally, free NHS prescriptions and free eye tests for over-60s on a State Pension are not impacted.

Because rules and thresholds can be complex and subject to change, it can be beneficial to get personalised advice to understand how equity release affects benefits in individual situations.

Is equity release taxable?

No, equity release is not taxable because the money you receive is treated as a loan, not income, so you don’t pay income or capital gains tax on it.

There are also potential inheritance tax (IHT) benefits. Reducing the value of your estate by accessing the equity you have built up can help lower your potential IHT liability. Currently, anything over the £325,000 threshold is taxed at 40%, so lowering the value of your estate could help maximise what you pass on to your loved ones.

How to start the equity release process?

The best first step if you’re considering a form of equity release is to speak to a financial adviser, an equity release provider, or an equity release advice service like LV=. They can provide you with the necessary information needed to ensure you’re making the right decision for you and your family’s financial future. It may be that a financial adviser recommends that you don’t release equity if they don’t think it’s in your best interests.

The adviser you choose should always be regulated by the Financial Conduct Authority (FCA), and if they are also a member of the Equity Release Council then you can be even more reassured that they have the required knowledge to provide the best advice. 

LV= offer FCA-regulated equity release advice

If you’re looking to release equity and are nearing or over 55 years of age, LV=’s equity release advisers are here to help. We compare the whole of the market to find the right equity release plan for you. If we don’t think equity release works in your best interests, then we’ll tell you. 

Request a commitment free callback today and see how our LV= experts can help you.