16th July 2016
Up to three million people of working age who are planning to use the value of their home to fund their retirement instead of a pension could be heading for a shock, argues pension firm Royal London as it publishes new research.
The mutual insurer argues that evidence suggests that a small but growing proportion of people are choosing not to save for their retirement through a pension. Instead, they plan to ‘downsize’ to a smaller property, and to use the proceeds to fund their later life. But the latest Royal London policy paper: “The Downsizing Delusion” shows that for the vast majority of people, this strategy is likely to lead to a slump in their standard of living when they stop work.
The report shows that, looking 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) and using the proceeds to buy an annuity would secure an annual income (from annuity plus state pension) of £13,700. But the typical UK full-time worker has an annual wage of £27,400. This means their income would slump by half on retirement.
The report also highlights a number of barriers to a ‘downsizing’ strategy
Table 1. Estimates for the UK, nations and English regions of potential income from downsizing as percentage of pre-retirement wage
|Value of average detached house (£k)||Value of average semi-detached house (£k)||Equity released by downsizing
|Income generated by equity plus value of state pension (£pa)||Average Wage (£pa)||Post-retirement income as % of average wage|
|Yorks & Humber||233||145||88||12.5||49%|
Steve Webb, director of policy at Royal London says: “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.”