When considering an equity release, you may be worried about the potential impact on your State Pension.
Equity Release does not impact your State Pension entitlement. As the money released is a loan, it is not income, so there is no tax to pay. However, if you receive Pension Credit (a means-tested benefit), your entitlement and the amount you can claim may be impacted if you exceed the savings threshold (£10,000).
Let's explore your pension in greater detail.
The state pension is a universal benefit available to everyone once they reach the State Pension age. The full new State Pension is £175.20 per week, but the actual amount you receive depends on your National Insurance Record.
As your state pension is paid based on your national insurance contributions, any equity release plan will not affect your guaranteed State Pension.
People now reaching pension age now will need 35 years of contributions (NICs) to get the full state pension (currently £175.20 per week).
If you have missed contributions in recent years or will miss payments if you consider early retirement, you can pay extra contributions to fill in the gaps.
The National Insurance voluntary contribution rates for the 2020 – 2021 tax year are £15.30 for Class 3 and £3.05 for Class 2. The NICs that you can pay voluntarily usually are Class 3 contributions. Still, if you're self-employed or working abroad, you can pay Class 2 contributions instead.
For more information on National Insurance payments, please visit https://www.gov.uk/national-insurance.
You will also be able to find out how much you can expect to receive when you reach your state retirement age by visiting https://www.gov.uk/check-state-pension.
However, equity release can impact on your pension credit entitlement. Let's explore the impact in greater detail.
Pension Credit is a top-up to your State Pension, which you are entitled to if you are over State Pension age and are on a low income.
Pension Credit tops up your weekly income to £173.75 if you are single, or your joint weekly income to £265.20 if you have a partner.
If your income is higher, you might still be eligible for Pension Credit if you have a disability, care for someone, have savings, or have housing costs.
You can use the Government eligibility calculator at https://www.gov.uk/pension-credit/eligibility.
As funds released with an equity release plan are not income, your entitlement to Pension Credit is not directly impacted. However, if you place funds released into savings, you could exceed the savings threshold (currently £10,000).
If you have £10,000 or less in savings and investments, this will not affect your Pension Credit.
If you have more than £10,000, every £500 over £10,000 counts as £1 income a week. For example, if you have £11,000 in savings, this counts as £2 income a week.
Therefore, if you receive Pension Credit, you should discuss how your entitlement could be affected with your equity release advisor.
If you receive Pension Credit, you may also be able to claim other benefits, including:
- Council Tax Reduction
- Free TV Licence if you are aged 75 or over
- Help with your heating costs
- Help with NHS dental treatment, glasses and transport costs for hospital appointments
You can find further details at https://www.gov.uk/pension-credit.
Any private pension will be unaffected by an equity release. However, you may wish to consider substituting the amount of pension you draw with an equity release plan.
This is a specialist area of financial advice and will require advice from both an equity release advisor and a pensions advisor.
With most personal pensions, your provider will have set an age when you can start taking money from your pension pot. Most are not actually from age 55, so you will need to contact your pension provider to find out what age your pension is available.
With a private pension, you can take up to 25% of the money you have built up as a tax-free lump sum. Once you have taken the initial lump sum, you then have six months to start taking the remaining 75%, on which you will usually pay tax.
There are options you have for taking the rest of your pension pot, and these include:
- taking all or some of it as cash
- buying an annuity for life that gives you a guaranteed income
- investing the funds to get a regular, adjustable income which is sometimes known as 'flexi-access drawdown'
For further information, see https://www.gov.uk/personal-pensions-your-rights/how-you-can-take-pension.
I am not a pension advisor. However, I am happy to work alongside any pension, wealth, or tax planners you have to receive your money in the most efficient way possible.
If you have further questions, why not speak with one of our qualified advisors?
Call us on 0207 158 0881 or use our online form to book your FREE consultation.
While a qualified equity release advisor has written this guide, it is not intended to be used as financial nor legal advice and should not be relied upon.
To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.
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