The UK property downsizing pension delusion

Added 18th July 2016

Up to three million people of working age in the UK who plan to use the value of their home to fund their retirement could be headed for a shock, says Royal London.

The UK property downsizing pension delusion

Evidence suggests that a small but growing proportion of people are choosing not to save for their retirement through a pension and instead plan to downsize to a smaller property and use the proceeds to fund their later life.

A policy paper from Royal London, ‘The Downsizing Delusion’, shows that for the vast majority of people this strategy is likely to result in a lower standard of living when they stop work.

Across the UK as a whole, the average person downsizing from an average detached house (worth £310,000) to an average semi-detached house (worth £197,000) will be able to buy an annuity of £13,700 ($18,057, €16,361).

The typical UK full-time worker earns £27,400 per annum, meaning that their income will slump by half on retirement.

Additional barriers

People contemplating using their property to fund their retirement face additional challenges. 

“Hoping to live off the value of your home could be a ‘downsizing delusion’ for millions of people."

With millennials being boxed out of the housing market and staying at home for longer, downsizing could be difficult if the ‘spare room’ isn’t actually spare.

At retirement, many could still be paying a mortgage. One in three mortgages now lasts to age 65+; and of these, one in three is a first-time buyer.

There is no guarantee that house prices will not be in a low period when the time to retire rolls round, leaving house sellers with the option of taking a lower payment or delaying retirement until house prices pick up.

There may be few options when it comes to choosing a ‘downsized house’. Particularly in rural areas finding a suitable property that does not mean moving away from friends and social networks may be impossible.

Also, when push comes to shove many may decide that they don’t actually want to move. Survey evidence suggests that five out of six larger family homes are put on the market following the death of the owner.

Downsizing delusion

Steve Webb, director of policy at Royal London, said: “Hoping to live off the value of your home could be a ‘downsizing delusion’ for millions of people. In most of Britain, the amount of money you could free up by trading down at retirement to a smaller property would generate a very modest income. Someone who chose to save for later life through their home rather than through a pension could easily see their income halve at retirement.   

“If they opt out of workplace pension saving they are also missing out on tax relief on pension contributions and a valuable contribution from their employer. Even with today’s record house prices, very few people could fund a retirement by selling up and moving to a smaller property. 

“In addition, house prices can be volatile, not least in the light of the recent Brexit vote, and depending on the value of a single asset – your home – to fund your whole retirement is an incredibly risky strategy,” Webb said. 

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About Author

Kirsten Hastings

Senior Reporter

Kirsten is a senior reporter for International Adviser, covering global news stories about the financial services industry. She joined Last Word Media in October 2015 after two years working as a reporter covering the staffing and recruitment industry. Kirsten has a Masters in Financial Journalism from the University of Stirling. 

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