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The downsizing delusion

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While your home might be your castle, there are good reasons why it shouldn’t be your pension, says financial writer Kara Gammell

Millions of workers who are relying on their property to fund their retirement may be in for a big surprise. According to research by Royal London, a pension company, downsizing and living off the proceeds of a house sale is unlikely to produce a decent level of income for later life. 

Trading down is not the answer 

Relying on the value of your home to fund your retirement is unlikely to produce an adequate incomeRoyal London’s research, from July 2016, found someone downsizing from a home worth £310,000 to one worth £197,000, and buying an annuity with the money they made, combined with the state pension, could produce an income of about £13,700 a year. This is around half the average UK wage and far below the level of two-thirds of pre-retirement income that many experts believe is the minimum to aim for .

“Hoping to live off the value of your home could be a ‘downsizing delusion’ for millions of people,” says Steve Webb a pensions expert at Royal London, and former pensions minister in the 2010-15 coalition government. 

“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. What’s more, someone who chose to save for later life through their home rather than through a pension could easily see their income halve at retirement,” Steve adds. 

Royal London estimates that around three million home owners are choosing not to save for their retirement. Instead, they are relying on swapping their home for a smaller property and using the proceeds to fund their later life. Those who opt out of workplace pension are also missing out on employer contributions and tax relief, which in many cases can double the amount being paid in.

Property is many people’s biggest asset 

But according to the Aviva Real Retirement Report (July 2016), nearly half of over-45 homeowners – equivalent to over 6 million UK households – see the wealth built up in their property as a key part of their plans for retirement. What’s more, Aviva’s research also finds almost seven in ten over-45 homeowners say that their home is worth more than their pensions, savings and investments combined . 

“Property assets more than match pension wealth for many older homeowners, so it is sensible to consider bricks and mortar among the options to supplement their savings,” says Clive Bolton, a pensions and investment expert from Aviva. “However, later life brings a host of financial challenges and pressure points, which suggest it would be wise not to place all retirement bets on the house.”

Five reasons why you shouldn’t rely on property as your pension:

1. Overestimating how long the money will last

The number of people who plan to sell their primary residence to fund their retirement could be as high as 3 million, according to Baring Asset Management . 

But downsizing is not always as easy as it sounds. A house half in size will not necessarily be half the price. What’s more, while the equity built up in people’s homes may sound like a lot, considering that many can be retired for 20 years or more and often want to help their families as well as themselves, it’s easy to overestimate how long that money will last. 

People need to consider if there is enough house to go around and build this into their retirement plans alongside their other assets.

2. Housing market slump

Property prices go through periods of boom and bust; if your planned retirement date is after a house price fall, you may have to delay your retirement. With other investments, it is easier to smooth the ups and downs of the economic cycle.

“If the housing market slumps you could, at best, sell your property for less money than you had hoped and at worst, not be able to sell it at all,” says Philippa Gee, of Philippa Gee Wealth Management.

“This will have a direct impact on your plans for retirement, so you should be very careful in your decisions.”

3. The nest may not be empty

Many parents approaching retirement age may find that downsizing to free up capital is not possible thanks to adult children still living at home.

In fact, Aviva has forecast that the numbers of adult children living with their parents, up to the age of 34, will increase by a third to 3.8 million in the next decade .

Many are part of what’s been called the ‘Boomerang Generation’ – a growing number of young people who have moved back in with their parents while saving for a house deposit or to cope with high rental costs.

“If your children want to stay at home to reduce costs, or you have older relatives who want to live with you, you could find that downsizing is not an option,” said Philippa. “The key to this is to have a plan, but you should keep reviewing it and be willing to change.”

4. Still paying your mortgage

One in three mortgages now lasts to age 65 or beyond, and of these, one in three is to a first-time buyer. As  a result, a growing number of people will still need income to pay a mortgage beyond traditional retirement ages. This is one of the driving factors behind many workers delaying retirement.

According to HSBC's 2016 Future of Retirement report, on average, pre-retirees expect to work until they are 63, compared to 59 for current retirees . If you still owe money on your mortgage, this will have a significant impact on any money you may make through downsizing.

5. Gentrification of rural areas

While retirees may no longer have to worry about being close to schools and the station, many will want to stay in their local area due to friends and family ties. But thanks to rising property prices, it might be difficult to find something suitable that is affordable and will free up enough cash to retire on.

“You may find that the price of a smaller place has increased in value more and you do not have the amount of capital you thought you would have,” says Philippa. 

Retiresavvy is brought to you by Skipton Building Society. This article has been commissioned by retiresavvy and any opinions voiced are the author's own.

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