Nasty shock for people planning to retire on house value

A growing number of people hoping to fund their retirement entirely with the income made from downsizing to a smaller home is likely to be in for disappointment, a new report has claimed.

With more mortgages now lasting well beyond traditional retirement age and uncertainty about whether house prices will continue to rise, home owners planning to live off the value of their property only are likely to see a drastic slump in their standard of living when they stop work.

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 of £13,700, including full state pension, according to a new report by Royal London.

But this means that their income would slump by half in retirement as the typical annual wage of a full time worker stands at £27,400.

Former pensions minister Steve Webb, who is now 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.’

He continued: ‘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.’

Growing numbers of people, including first-time buyers – are taking out mortgages past traditional retirement ages, with one third of all mortgages lasting beyond the age of 65, and one third of those mortgages is to a first-time buyer, according to the report. This means that many will still be paying off their mortgages in retirement.

It has also suggested that finding a property to downsize to might prove difficult, especially in rural areas.

Last week the Royal Institution of Chartered Surveyors said that the number of homes coming onto the market had plummeted at the sharpest rate on their records shortly after the UK’s vote to leave the European Union.

More surveyors also expected house prices to grow at a slower pace in the future.

Some 8 per cent of Britons, which if applied to the UK population equals to about 3million people, have said they plan to use solely the value of their home to fund their later years. This is up from 5 per cent six years ago, according to a recent survey of 1,500 people cited by Royal London.

But while more people are relying on downsizing to fund retirement, Royal London said that in most parts of the country it is ‘totally unrealistic’ to think that trading down will generate enough income for life of the sort of level that most people would want in retirement.

Looking across the UK, the report found that trading down from the average detached house to the average semi-detached house at retirement would generate less than two-thirds of pre-retirement income everywhere outside London and the South East.

The picture painted in the report, however, is rosier than in reality as, for example, stamp duty charges, which would eat a big chunk of equity, are not included in the calculations.

Moreover, the figures are based on average wages, although many people later in life earn more money, so the income shock after retiring could be bigger than calculations.

And with many people retiring as a couple, two people could be relying on the proceeds from downsizing one home to fund their retirement.

In London, the calculation was particularly generous to downsizers. It was assumed that someone on an average London wage can afford a detached home, typically worth £854,000, whereas in reality many will not be living in this type of property.

The report also also warned other hurdles may cause those with dreams of downsizing to stumble.

Current generations of workers have children at later ages than previous generations and those children are staying at home for longer until they can buy a first home. This means that downsizing may be difficult if the ‘spare bedroom’ is not spare.

‘Across the UK as a whole, and particularly outside London, the amount of income that could be generated by downsizing at retirement is likely to be only a modest fraction of the amount needed for a decent retirement,’ the report concludes.

‘For those wanting a good quality of life in old age, investing consistently in a pension with the benefit of tax relief and an employer contribution is likely to be by far the best strategy. The alternative, of a “downsizing dream” could easily turn retirement into a nightmare.’

Value of average detached houseValue of average semi-detached houseEquity released by downsizingIncome generated by equity plus value of state pension (pa)
East Midlands£243,000£155,000£88,000£12,500
North East£199,000£124,000£75,000£11,800
North West£249,000£154,000£95,000£12,800
South East£512,000£322,000£190,000£17,600
South West£349,000£231,000£118,000£14,000
West Midlands£280,000£168,000£112,000£13,700
Yorks & Humber£233,000£145,000£88,000£12,500
N Ireland£180,000£113,000£67,000£11,400
Source: Royal London

Written by: Houseladder