New research has found that up to three million people are planning to use the value of their home to fund their retirement instead of a pension.
However, by downsizing to a smaller property and using the proceeds to fund their later life could potentially lead to a slump in their standard of living once they stop work, pension giant Royal London has warned.
The average person downsizing from a property worth £310,000 to a semi-detached house worth £197,000, would release £113,000 of equity.
Using the proceeds to buy an annuity would secure an annual income of £13,700, half the average annual wage of £27,400.
Steve Webb, director of policy at Royal London, said relying on your home to fund retirement could prove to be an “incredibly risky strategy”.
He 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.”
Downsizing could also prove to be a problem as children are also staying at home longer until they can buy a first home, making it difficult if there is not a spare bedroom available.
With one in three mortgages now lasting to age 65 or beyond, you may still be paying your mortgage.
Growing numbers of people will still need income to service a mortgage beyond traditional retirement ages, so this could also eat into any money freed up.
House prices go through periods of boom and bust, so if your planned retirement date is after a house price fall, you may have to defer your retirement.
There may also be nothing to downsize to, a problem particularly common in rural areas.
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
(£k) |
Income generated by equity plus value of state pension (£pa) | Average Wage (£pa) | Post-retirement income as % of average wage | |
| UK | 310 | 197 | 113 | 13.7 | 50% | |
| East | 386 | 267 | 119 | 14.0 | 52% | |
| East Midlands | 243 | 155 | 88 | 12.5 | 50% | |
| London | 854 | 560 | 294 | 22.8 | 66% | |
| North East | 199 | 124 | 75 | 11.8 | 47% | |
| North West | 249 | 154 | 95 | 12.8 | 51% | |
| South East | 512 | 322 | 190 | 17.6 | 61% | |
| South West | 349 | 231 | 118 | 14.0 | 55% | |
| West Midlands | 280 | 168 | 112 | 13.7 | 53% | |
| Yorks & Humber | 233 | 145 | 88 | 12.5 | 49% | |
| Scotland | 235 | 147 | 88 | 12.5 | 46% | |
| Wales | 207 | 135 | 72 | 11.7 | 48% | |
| N Ireland | 180 | 113 | 67 | 11.4 | 45% |
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