The current crisis is having a devastating financial impact on millions of people’s lives, prompting many to look at ways they might be able to give themselves an emergency cash boost.
Huge numbers of people have seen their incomes plummet in recent months, or have lost their jobs altogether, and not all are eligible for financial support from the government.
There are several ways that it might be possible to raise a lump sum to help you through these difficult times, but none of these should be entered into lightly or without fully understanding the risks and consequences involved. Here, we look at some of the options that might be available to you and explain the pros and cons of each.
Equity release is a way for homeowners to unlock some of the wealth they have tied up in their property without having to move out. Instead of making a regular monthly payment as you would with a normal mortgage, this sum, plus the interest owed, only has to be repaid once you and your partner die or go into long term care.
If you’re considering equity release, you should only deal with providers who are approved by the Equity Release Council, which is the trade body for the equity release sector. Members of the Council must provide plans which come with a ‘no negative equity’ guarantee. This guarantees you’ll never owe more than your property is worth, even if house prices fall dramatically.
Since 2014, it has been compulsory for a solicitor to have at least one face-to-face meeting with their client during the equity release process to ensure that they understand exactly what they are getting into. However, now that social distancing is a requirement, legal advice can be provided in writing and then followed up with video or telephone calls.
You must be aged 55 or over and own your home to be eligible for equity release. If you want to apply jointly with a partner, both of you must be aged 55 or over. You can apply for equity release if you’re still paying a mortgage on your property, but you must use some of the funds released to pay off the balance of your mortgage.
Most providers require your property to be worth at least £70,000 to qualify, and it must be your main residence.
An equity release plan enables you to stay living in your home whilst accessing some of the cash you have tied up in it. You don’t have to make any monthly repayments, so you don’t have to worry about paying back what you owe.
Equity release products have become much more flexible in recent years, so many plans come with additional features such as ‘downsizing protection’ which allows you to repay your equity release plan in full if you decide you want to downsize and move to a cheaper property in future.
Taking equity out of your home will reduce any inheritance you might have been hoping to leave loved ones, and it could affect your entitlement to means-tested benefits. You will also no longer be the sole owner of your main home.
Although equity release rates are relatively low at the moment, interest on the capital you’ve borrowed is compounded, which means it is charged not only on the amount you originally borrowed, but also on any interest that has been built up in the previous month. This means that it’s likely you’ll end up owing far more than you borrowed at the outset.
Equity Release is a complicated area with many things to consider. If you want to find out more about how equity release works you can read our full Guide to Equity Release.
Taking money out of your pension
Pension freedoms introduced in 2015 mean you can usually take some or all of your pension out once you reach the age of 55.
If you did this, you’d pay no tax on the first 25% of this money, but the remainder would be taxed at your income tax rate.
Pension freedom rules only apply if you have a defined contribution pension, sometimes known as a money purchase pension, where the amount you’ll receive at retirement depends on how much you (and your employer if it’s a company scheme) have paid in, and your investment returns. They don’t apply to defined benefit or final salary pensions, which provide you with a retirement income that is equivalent to a proportion of your final salary.
Accessing your pension to help with your cash flow can seem a tempting option, but it’s vital to think about the consequences this might have on your future retirement income. If you’re considering taking money out of your pension, always seek professional advice or guidance first.
If you’re 50 or over and have a defined contribution pension, you can get free guidance over the phone on the options available to you from the Government’s Pension Wise service. However, if you want personal recommendations or advice about your specific circumstances, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to Find the Right Financial Advisor for You or How to Get Advice on Your Pension.
If you are considering getting financial advice, VouchedFor, the review website for financial advisors, is offering Rest Less members a free pension check with a local advisor. There’s no obligation but once you’ve had your check, the advisor will discuss the potential for an ongoing relationship if you think it might be useful to you.
If you have a defined contribution pension, you can usually take a 25% tax-free lump sum or more from your pension once you reach the age of 55. However, different pension schemes can have different rules, so you’ll need to check with your provider to see at what age you can start taking retirement benefits.
Due to the flexibility of being able to access the money in your pension, we are hearing that some people are also considering transferring their final salary pensions across to a standard defined contribution pension – in order to access a cash lump sum in these difficult times. It’s important to note that the pensions regulator is warning people of the risks of doing this as it is rarely the right thing for most people to do. For more information on transferring out of a final salary pension you can read our full guide here.
Taking cash out of your pension might help with your cashflow and the first 25% can be taken tax-free. However, don’t rush into taking money out of your retirement savings if you have any other sources of cash available, as the more you take out now, the less you’ll have to live on later.
Any money you take out of your pension pot will be taken into account and classed as savings if you’re being assessed for means tested Government benefits and you haven’t yet reached state pension age. For example, if you have savings (including money you take out of your pension) of more than £6,000 then your entitlement to Universal Credit will be reduced and with savings of £16,000 or more, you no longer become eligible to claim. Once you have reached state pension age, even savings tucked inside your pension pot will be factored in when your income is assessed.
Taking money out of your pension could also have serious consequences for your future retirement income, especially if you withdraw your money when markets are falling, and the value of your pension savings has reduced.
By taking a cash lump sum out of your retirement savings when markets are volatile, not only do you risk selling at a low, but you could end up landing yourself with a big tax bill if you take out more than 25%.
It’s also important to bear in mind that if you’ve started taking an income from your pension, but still want to keep paying into it, your annual allowance – the amount you can pay into your pension each year whilst still receiving tax relief – falls to £4,000 rather than the usual £40,000. This lower allowance doesn’t apply if you only take your 25% lump sum and no income.
You can read more about taking a tax-free lump sum from your pension in our article Should I Take My Tax-Free Pension Cash at 55?
Earlier this year, the financial regulator the Financial Conduct Authority (FCA) said that all current account customers would have the first £500 of their overdraft charged at zero interest for three months. This was only a temporary measure, so many banks are no longer providing this support. However, some banks, namely Lloyds, Bank of Scotland, Halifax, Santander, Virgin Money, Clydesdale Bank and Yorkshire Bank, are continuing to provide a £500 buffer to customers who’ve been financially affected by coronavirus, so if you do bank with one of these, let them know if you need help.
If you have an authorised overdraft with your bank, and it is continuing to provide £500 interest-free overdrafts to customers needing one, you should qualify, but you’ll need to let them know that your finances have been affected by coronavirus.
If you don’t already have an authorised overdraft you won’t benefit from an interest-free £500 overdraft. You can apply for an overdraft but there are no guarantees you’ll get one. If you are offered one, however, you should then be eligible for the £500 interest-free overdraft.
A £500 overdraft could be a real help, especially as you won’t be charged any interest on this borrowing.
You should be able to request an interest-free overdraft until 31 December 2020 if you bank with Lloyds, Bank of Scotland or Halifax, or 31 January 2021 if you bank with Santander. There’s currently no deadline if you want to apply for one with Virgin Money, Clydesdale Bank or Yorkshire Bank, and the interest-free overdraft should apply for three months after the date you requested it.
Any money you borrow must be repaid eventually and when the interest-free period on your overdraft ends, banks will charge their usual, often steep, rates of interest.
Taking a break from your mortgage, loan or credit card payments might enable you to free up some cash that would otherwise have gone towards these.
Households who are finding it difficult to cover mortgage costs due to coronavirus can take a payment holiday for up to three months, whilst those struggling with credit card and loan repayments can also take a break from payments. According to latest data from trade body UK Finance, so far 1.8m mortgage customers have been given mortgage payment holidays, equivalent to one in seven mortgages. By November, the number of borrowers with payment holidays still in place had fallen to 127,000.
Households who are finding it difficult to cover mortgage costs due to coronavirus can take a payment holiday for up to three months, whilst those struggling with credit card and loan repayments can also take a break from payments. According to latest data from trade body UK Finance, so far 1.6m mortgage customers have been given mortgage payment holidays, equivalent to one in seven mortgages…
If you need to pause your payments, you’ll need to get in touch with your lender first, usually by phone, although some will allow you to request a payment holiday online. Bear in mind that lenders are dealing with huge numbers of enquiries, so you may need to be patient.
Find out more about how mortgage payment holidays work in our article Everything you need to know about taking a mortgage payment holiday. Bear in mind there might be other options available, so if you’re unsure what to do, you may want to seek professional mortgage advice. Two well respected fee-free mortgage brokers you could try are Fluent Mortgages or London & Country Mortgages. They can discuss which course of action might suit you best and advice which deals you might be eligible for based on your individual circumstances.
If you have a credit card or loan, you should be able to ask your lender for a payment holiday for three months. You can then request another three-month payment holiday if you’re still struggling to pay.
You’ll need to get in touch with your lender to request a payment break, usually by phone, although some will allow you to ask for a payment holiday online. It’s important to remember that interest will continue to build up on the balance you owe, so whilst it might provide some essential breathing space, taking a payment holiday from your loans or credit cards can be one of the more expensive ways of reducing your monthly outgoings.
Anyone suffering temporary financial difficulties due to the coronavirus pandemic should be eligible for a payment holiday from their debts. You’ll usually be asked to self-certify that your income has been affected.
Not having to pay your mortgage, credit card or loan bills for a few months could provide you with some valuable financial breathing space, enabling you to put any money you’re not spending on these towards other essential living costs.
Even though you won’t have to pay back your debts temporarily, remember that interest will continue to build up on what you owe. This means that when you start repaying what you owe in a few months’ time, your payments will be higher. It’s therefore usually only a good idea to take a break from payments if you really can’t afford to make them.
Whilst taking a break from mortgage, credit card or loan repayments shouldn’t have an impact on your credit score – it’s important to know that it may still make it significantly more difficult to get access to credit in the future. This is because lenders use a range of information in addition to your credit score to assess an application for credit, and lenders will be able to see a gap in payments from a payment holiday, even if your credit score has not changed.
If you have investments, such as stocks and shares ISAs, you might be considering cashing them in to provide you with some money to fall back on.
Whilst it does depend on the type of investments you hold, you can usually sell standard investments whenever you want and have the proceeds paid directly into your bank account, but remember that the value of your investments can go up or down, so if you cash them in when markets are falling, you could get back less than you put in.
Anyone with investments can sell them, unless there’s a specific tie-in period in your investment small print, or if you hold a type of investment that is difficult to sell e.g. property or small unlisted companies.
If you need access to money quickly, selling investments might provide you with the cash you need. If you’re taking money out of a stocks and shares ISA, check with your provider to see if it is flexible. If it is, you’ll be able to withdraw money and then reinvest at a later date within the same tax year, without it counting towards your annual ISA limit. In the current 2020/21 tax year the annual ISA limit is £20,000.
If you make an emergency withdrawal from your investments and their value has fallen, this means you’ll be turning paper losses into real ones so you might want to consider if you have other ways to raise the cash.
It’s also worth bearing in mind that if you’re making a withdrawal from a stocks and shares ISA and it isn’t flexible, you won’t be able to put the money back into your ISA at a later date without it counting towards your annual ISA limit.
It’s also worth remembering that if you sell a large number of investments, you may trigger a liability to capital gains tax on any profits you have made from those investments over the years. This is triggered if you make a profit of more than £12,300 from assets you sell in the 2020/21 tax year. For more information about capital gains tax visit the Government website here.
Get overpayments back from your energy supplier
Millions of us have set up direct debits to pay our energy bills monthly, but this can result in us overpaying during warmer months when we’re not using as much gas and electricity.
Energy suppliers owe 13m households a total of £1.7 billion in energy overpayments, according to research by comparison site uSwitch.com, a 13.5% (£230m) increase on 2019. Almost half (46%) of UK homes could reclaim an average of £136 each back from our suppliers, whilst one in ten (10%) could be due a rebate of over £200. If you think you might have a credit balance you could claim back, get in touch with your supplier and ask for a refund.
Anyone who pays for their energy by direct debit should check their bills to see if they’ve got a big balance sitting in their energy account. If you think you might have an overpayment you could claim back, get in touch with your supplier and ask for a refund. You can find contact details for energy suppliers here.
You may also be able to save money on your energy bills. For more information, read our guide on saving money on your energy bills.
Claim a tax refund if you've lost your job
If you’ve recently been made redundant, or have lost your job mid-way through the tax year, you might be eligible for a refund from the taxman.
Income tax is calculated over the full year and so if you lose your job before the end of the tax year, then you won’t have earned as much as HMRC expected you to originally, which means you’ll probably have overpaid tax.
If you’re not working and are made redundant before the end of the tax year (so any time between April 6 and April 5) and you were previously paying tax through the Pay As You Earn (PAYE) system, you might qualify for a tax refund.
The amount you’re likely to receive will depend on various factors, such as how much tax you paid on your earnings while you were in work, and whether you paid tax on any other income. It will also depend on how much you’ve earned since the tax year started. Find out more in our article How to claim a tax refund if you lose your job.
If your claim is successful, you’ll either receive a refund directly into your bank account, or you’ll be sent a cheque. If you aren’t entitled to a refund, HMRC will write to you and explain why your claim has been refused.
Learn more about claiming a tax refund here.
You must claim your tax refund within four years from the end of the tax year in which you overpaid. If you don’t make your claim within this period, you won’t be able to get a tax rebate, even if you’re owed a considerable sum.
Although there may be several different ways to access emergency cash, none of these should be entered into lightly as they may have serious consequences for your financial future. Always seek professional financial advice before proceeding and check whether you might be eligible for financial help from the government. You can find out more in our article Financial support for those affected by coronavirus.
Have you looked into ways to raise emergency cash, or have you already made use of one of the above options? Join the money conversation on the Rest Less Community or leave a comment below.