Moving to a smaller house funds a bigger pension in London than in the North

31st July 2013

Downsizing a home in Greater London – perhaps unsurprisingly – allows you to release substantially more cash to convert into a pension than in other regions of the UK according to research by MGM Advantage.

The firm used the example of downsizing from a detached house to a bungalow to find that in Greater London you could realise £238,690 while in Northern Ireland the figure is a relatively paltry £24,745. The research takes the costs of moving and stamp duty into account.

While not everyone may have their heart set on a bungalow for their twilight years, the research does provide a reasonable guide to those who have decided that their property will provide some or all of their pension.

It calculates that the sum for London once grossed up and used to buy an annuity could generate a monthly income £1,342 at current annuity rates. This would require you to give all your capital to the annuity provider to generate that guaranteed income for life. The firm calculates that, alternatively, if you wanted to retain access to the capital, it could generate monthly interest of around £348 a month at current rates.

At the opposite end of the spectrum, Northern Ireland fares worst when looking at property downsizing. From a similar property move, you could generate around £24,000, providing a monthly income of around £139 from an annuity or £36 from an interest paying deposit account.

If you compare these numbers with the UK average, moving from a detached property to a bungalow could generate a sum of £84,000, providing an income of £475 from an annuity (once grossed up at 20% tax relief because the money is being invested in a pension first) or £123 a month from a monthly interest paying deposit account.

MGM Advantage’s retirement expert Andrew Tully says: “Using your own home to provide the income for your retirement is an option for people who have no other savings. But, you should never have all of your eggs in one basket, as these figures show significant regional variations in who could benefit from downsizing. People who are able to save should consider other forms of saving, whether that be in pensions or ISAs, rather than banking on your own home to fund your retirement.”

So, how much equity could be released by downsizing your property?

Region Capital released by moving from a detached property to a bungalow1 Monthly income from an annuity (fund at 20% tax relief)2 Monthly income from an annuity (fund at 40% tax relief)2 Monthly income from cash account3 Monthly income from 5-year income bond4
UK £84,776 £475 £570 £123 £194
North £70,469 £394 £474 £102 £161
Yorkshire and Humberside £54,854 £310 £368 £80 £125
North West £87,780 £492 £590 £128 £201
East Midlands £61,850 £347 £415 £90 £141
West Midlands £62,319 £349 £418 £90 £142
East Anglia £68,217 £381 £458 £99 £156
South East £153,218 £860 £1,034 £223 £351
South West £66,126 £370 £444 £96 £151
Greater London £238,690 £1,342 £1,608 £348 £547
Wales £71,105 £398 £478 £103 £162
N. Ireland £24,745 £139 £167 £36 £56
Scotland £49,717 £282 £335 £72 £113


Tully says: “Anyone considering downsizing will need to think carefully how that money will be used to provide a regular income in retirement. If you have other sources of income, then this may be less of an issue. But for those people who have banked on downsizing to provide a pension, these figures might come as a shock. With annuity rates still very low, and other low risk options paying very little interest, then perhaps this should serve as a warning to future generations banking on their home for their pension.

“There are benefits from choosing an annuity, with the uplift from tax-relief and a guaranteed income. But that needs to be balanced with many peoples wish to retain control of their capital. However, you could run the risk of inflation eroding the returns on that capital over time or risk outliving your retirement fund. Doing your homework and understanding the risks, as well as seeking professional advice, is key to ensuring your retirement remains on track.”

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