The dangers of relying on your home as a pension fund

Equity release

People of working age who are planning to use the value of their home to fund their retirement could see their standard of living slump, according to new research from Royal London.

Around 1,500 people were surveyed, and the data 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 given that the typical UK full-time worker has an annual wage of £27,400 they will have to change their living standards - as their income would slump by half.


Downsizing barriers

Currently, 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. Further, the Royal London report highlights numerous barriers to a 'downsizing' strategy.

The first barrier is that your nest may not actually be empty. Current generations of workers had children at later ages than previous generations and those children are staying at home for longer until they can buy a first home.

Indeed a report in 2014 by the Institute for Fiscal Studies found that one in four people aged between 22 and 30 are living with their parents.


Many are part of the Boomerang Generation, a growing number of graduates who have moved back in with their parents after leaving university and starting working. Therefore, downsizing may be difficult if the 'spare bedroom' is not spare.

Second, you may still be paying your mortgage. One in three mortgages now last to the age of 65 and beyond, and of these, one in three is to a first-time buyer.

Growing numbers of people will still need an income to service a mortgage beyond traditional retirement ages. This is one of the reasons why a typical UK worker today expects to retire later than the previous generation.

According to HSBC's Future of Retirement report, on average, pre-retirees expect to work until they are 63, compared to 59 for current retirees.


Lack of housing supply

Third, your planned retirement date may coincide with a period of low house prices. After all house prices go through periods of boom and bust.

While a final consideration is that you may not be able to downsize. In a new report, 'Building More Homes', the cross-party House of Lords Economic Affairs Committee makes the point that lack of housing supply affects both young people who are hoping to start a family and also older people who would like to downsize to a smaller property.

Steve Webb, director of policy at Royal London, comments: '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.”

Estimates for the UK, nations and English regions of potential income from downsizing as percentage of pre-retirement wage:


Region Value of ave detached house (£k) Value of ave semi-detached house (£k) Equity released by downsizing (£k) Housing equity plus state pension p/a (£k) Average wage p/a (£k) Post-retirement inc as % of ave wage
UK 310 197 113 13.7 27.4 50
East 386 267 119 14 26.9 52
East Midlands 243 155 88 12.5 24.9 50
London 854 560 294 22.8 34.3 66
North East 199 124 75 11.8 25.4 47
North West 249 154 95 12.8 25.4 51
South East 512 322 190 17.6 28.7 61
South West 349 231 118 14 25.6 55
West Midlands 280 168 112 13.7 25.6 53
Yorks & Humber 233 145 88 12.5 25.3 49
Scotland 235 147 88 12.5 27.4 46
Wales 207 135 72 11.7 24.6 48
N. Ireland 180 113 67 11.4 25.2 45


This article was originally written for our sister magazine, Money Observer.