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BLOG: Is relying on your home as your pension a good idea?

BLOG: Is relying on your home as your pension a good idea?
Your Money
Written By:
Your Money
Posted:
06/10/2023
Updated:
13/10/2023

We often hear people talking about their home effectively being their pension - the idea that selling or downsizing their main family home will provide the funding they need in retirement.

One in 10 UK adults said they plan on selling their main home to fund their retirement, recent research by Nutmeg revealed.

While there is undoubtedly some merit in the notion – principally, if you’ve had a larger family home during your working life, you may not require as much space when any children have left home. And if your home has increased in value while you’ve owned it, there could be a good amount of capital to release from selling or downsizing.

However, the idea may not be as straightforward as some might think.

So, if you’re among the one in 10 people thinking that your home is your pension, here are some of the things you may want to consider to make sure you’re able to enjoy the retirement that you want:

Can you sell when you want for the price you want (or need)?

Property is an illiquid asset, which means it’s not always quick or easy to sell. According to the property website Zoopla, it takes an average 25 weeks to sell a home in the UK.

Now, most people will take quite a bit of time to decide when it’s right for them to retire. Some may decide to cut down from full-time work to part-time, before stopping work completely. But if you’re planning on using the proceeds from the sale of your main property as a means of funding your retirement, it could be a good idea to start thinking about it early. Plan on having another source of income in the time it takes to sell your property.

It can also be difficult to know how much of a cash pot downsizing could leave you with. After all, it only takes a slowdown in the property market and there could be a significant impact on your retirement income. For the first time in a number of years, the UK is experiencing a slow down or fall in house prices.

And while there’s no way of saying what the longer-term outlook is for the housing market, what we know is that  if you sold your house last year, the chances are you probably would have a slightly bigger pot than if you were to sell this year.

How much equity have you built up in your home?

As well as the price you may achieve when selling your home, it’s also important to consider how much equity you will have built up. In the past, people got on to the property ladder much younger. If I think about my parent’s generation, for example, it was typical to be getting onto the property ladder in their 20s. Now, the average age of a first-time buyer is 34.

The delay in getting onto the property ladder – the result of sharp rises in house prices among other factors – is likely to mean fewer people own their home outright by the time they retire.

In fact, in the same research from Nutmeg that found one in 10 will be selling or downsizing their home to fund their retirement, 14% of adults said they would still be paying their mortgage in retirement. A sixth (17%) said they will have more than 15 years on their term.

For those who don’t want to downsize but still want to create some income from their property, equity release is another option that could be considered. Also known as a lifetime mortgage, this is a way of releasing some of the equity without having to repay the mortgage until the owner passes away or goes into long-term care.

There are lots of different options and features of the product to consider, including interest (which can accumulate significantly over the term of the loan) so advice should be taken from a company that is a member of the Equity Release Council. It’s always wise to involve your family in the decision before going ahead.

How much equity you have in your property – that’s to say, how much of your home you own compared to how much your mortgage lender owns – will also impact how much cash you take away from any sale of the property.

Where are you moving to?

It might seem obvious, but you’ll also need to consider where you’re moving to. If you’re downsizing from a larger family home, are you likely to find yourself competing with first-time buyers, or those looking to buy their second property.

This middle part of the market can come under pressure – from those stepping onto or moving up the ladder and those coming down. It can mean the type of house you’re looking for costs more than you might expect, or the search for the perfect place takes longer.

It’s important to do your research on the sort of property you want to live in to give you a clear idea of how financially beneficial downsizing might be as a retirement option. Are you expecting to have regular visitors to stay, or family at Christmas, for example? Do you want to stay in the same area as before, and will a smaller house in that area help you realise enough gains over your current property?

Be prepared for the tug on your heart strings

It might seem odd to say – a house is just bricks and mortar after all – but downsizing can be emotional, especially if your home holds fond family memories. It’s a good idea to talk it through with your loved ones so that you’re all clear about the reasons for the move.

If you’re planning on downsizing, you are likely to find you may have to sell items you’ve been used to having around you in your home. It’s a good idea not to underestimate the time and emotion that will be involved with moving to a smaller property, and, if possible, to take your time.

There are also costs that come with selling your home and buying a new one: stamp duty, survey fees, legal expenses, estate agent fees and moving costs are all things you’ll want to factor in.

But there are of course benefits to downsizing your home and buying a smaller one. Along with reducing your bills, and putting some money towards your retirement, moving to a less expensive-to-run, smaller home could make your life simpler – leaving you with more time to do the things you enjoy in your later years.

With planning and careful consideration, the right option can usually be found.

Claire Exley is head of wealth services at digital wealth manager Nutmeg