Soaring living costs are having a massive financial impact on many people’s lives, prompting many to look at ways they might be able to give themselves an emergency cash boost.
There are several ways that it might be possible to raise a lump sum to help you through 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 to raise emergency cash and explain the pros and cons of each.
Release equity to raise emergency cash
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.
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.
If you’re looking for somewhere to start, you can get fee-free expert advice from a Rest Less Mortgages equity release specialist, with no broker fees on application. They are active members of the ERC and can advise on equity release mortgages from the whole of the market. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
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’re considering getting financial advice and are looking for somewhere to start, Rest Less Pensions are offering a free Pension Health Check with one of their experts. They can offer you information and guidance on the call and at the end will discuss whether you would benefit from paying for professional financial advice. Capital at risk.
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 article Should I transfer my final salary pension?
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. Find out more in our guide How lump sum payments and savings can affect your benefits. 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. Find out more in our article What is the Money Purchase Annual Allowance?
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? and about the pros and cons of dipping into your pension in our guide Should I use my pension to boost my income?
Borrowing money if you need emergency cash
Many people turn to credit cards and personal loans if they need emergency cash and don’t have savings available, but if you’re considering doing this, check carefully how much interest you’ll pay as interest charges can soon mount up. Our article Balance transfer credit cards and personal loans compared looks at ways you can keep borrowing costs down. Remember, you should try only to borrow money if you’re confident you’ll be able to repay what you owe relatively quickly.
If you have an authorised overdraft with your bank, check what proportion of this is interest-free and how much interest you’re paying once you exceed this buffer. If you want to apply for a credit card or personal loan, your credit score will need to be in good shape, as lenders will want to see that you’ve managed debts responsibly in the past. Many credit card and loan providers require you to have a minimum annual income to qualify, so always read the small print carefully before you apply. Find out more about credit cards in our article A simple guide to credit cards.
Borrowing can be a useful solution if you need cash quickly, but it won’t help if you know you’re not going to be able to get back on your feet financially any time soon. The good news is that current low interest rates mean that there are some competitive loan and credit card deals out there, although with interest rates gradually increasing, these deals may not be around for long.
Any money you borrow must be repaid eventually and if you’re already finding it hard to cover your costs, you could find that getting further into debt only makes your financial problems worse. If you’re struggling to manage your overdraft, a personal loan, or credit card debts, get in touch with your bank as soon as possible and let them know that you’re finding things difficult. They might agree to waive interest charges temporarily, reduce your overdraft interest rate, or help arrange an affordable repayment plan with you.
Selling your investments to raise cash
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 2022/23 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 2022/23 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.
If you think you might have a credit balance you could claim back, get in touch with your supplier and ask for a refund. Bear in mind however, that the current energy crisis may mean you end up very grateful for any credit balance you have, as energy costs are rising sharply. Read more in our article The energy bills crisis: what can you do about soaring costs?
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 may also be able to save money on your energy bills. For more information, read our guide on saving money on your energy bills.
Although you’re unlikely to get a huge amount of money back from your energy supplier, even a couple of hundred pounds could help alleviate some financial pressure. It’s easy to do too – all you need to do is call your supplier and ask them to return your money.
The downside of requesting any surplus balance to be refunded now is that now energy costs have risen substantially, and are set to increase again later this year, so you may find you don’t have enough spare cash in your energy account to cover them. Often your direct debit is based on your likely expenditure over the year, so even though you might be in credit now, the sharp jump in the energy price cap in April means you’re probably already facing much steeper bills. If you’re not sure whether asking for overpayments back is a good idea or not, discuss it with your energy supplier first. You might decide, for example, to take part of your surplus balance back, and leave a bit in your account.
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, remember that they may have serious consequences for your financial future. Always seek professional financial advice before proceeding.
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.