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Don’t be deluded over downsizing

Written by: Christina Hoghton
Relying exclusively on your home to fund your retirement could end in tears, a mutual company has warned.

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 in for a shock, according to Royal London.

A survey from the life, pensions and investment company suggests that a small but growing proportion of people are choosing not to save for their retirement through a pension. They plan to ‘downsize’ to a smaller property instead, and to use the proceeds to fund their later life.

However, Royal London’s new policy paper: “The Downsizing Delusion” warns 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.

Drop in income

The report shows 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, which means their income would slump by half on retirement.

Downsizing problems

The report also reveals a number of barriers to downsizing, from children living at home for longer to the fact that one in three mortgages now stretch beyond 65.

It’s also worth considering that your planned retirement date may coincide with a period of low house prices – which could mean you need to put your downsizing plans on hold until prices pick up.

It’s possible there may be nothing to downsize to, and this is even more likely in rural areas, where you may not want to move too far away from family and friends, but find nothing suitable to move to in your local area.

Steve Webb, director of policy at Royal London, 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.

“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.”

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