Don’t bank on downsizing your home for your retirement dreams

Standard Life has conducted analysis of the UK housing and retirement markets and is predicting a bleak future for many people hoping to use their current property to provide their pension. By calculating the average equity released from a property through downsizing (selling your existing home for a smaller property), Standard Life has worked out how much pension income that could potentially generate.

Most people want to retire on an income of 2/3rds of their working earnings. This should provide a similar standard of living in retirement, allowing for the fact most people will have paid off their mortgage and will not have costs associated with travelling to work. By comparing the income likely to be generated from the equity and retirement income aspirations, significant shortfalls have been identified.

The calculations…

The average detached home in the UK is valued at £343,058. If the owner downsized from the detached property to a bungalow in the same region (average UK value £118,260), and allowing for moving costs of £2,248, the equity released could generate a retirement income of £100 a week, or put another way, 30% of your retirement income.

Andrew Tully, Senior Pensions Technical Manager, Standard Life said: “Across the UK many people are pinning their hopes on a continuing strong housing market to provide the retirement of their dreams. The reality is somewhat different. Our analysis shows retiring and banking on your main residence to provide a sufficient retirement income is a potential retirement disaster unless you have made sufficient provision elsewhere.”

So just how much income can someone generate by downsizing their property?

This very much depends on the property type and how far someone wants to go. For example, if your main residence is a detached house, you could generate about 35% of your retirement income by moving to a semi-detached property. However, if you currently live in a semi-detached house and move to a flat, it may only generate around 2% of your retirement income.

Assumptions

Standard Life has made certain assumptions to arrive at these figures: importantly only looking at downsizing homes within the same geographical regions in the UK; and using the FSA annuity tables to turn the money released through downsizing into a notional retirement income.

Tully commented: “Our calculations show that on average, across the UK, downsizing your property will only provide 16% of your retirement income. It is vital people take control of their retirement planning, with the old saying of not having all your eggs in one basket never being more relevant. Property can be a valuable part of retirement saving, but it should not be the only option used.”

Regional Differences

There are significant regional differences in how much income downsizing your home might generate. The South East and London can potentially provide the best opportunity to supplement your retirement income while East Anglia and Scotland could potentially provide the least income.

Tully concluded: “People need to think long and hard about their retirement dreams before banking on their home to provide the income they want. Although there are many ways to unlock the value in your home, for example equity release, drawdown equity as well as downsizing, a broader mix of assets and investments combined with tax efficient wrappers should be considered, but always consult a professional financial adviser. That way you maximise your chances of enjoying the retirement of your dreams.”