Downsizing to fund retirement? Make sure you aren't left short of cash

Downsizing to fund retirement? Make sure you aren't left short of cash

More than half a million older homeowners are looking to downsize to help fund retirement? Here why that's a risky strategy.

Ruth Jackson

Mortgages and Home

Ruth Jackson
Updated on 8 September 2017

Hundreds of thousands of older Brits are risking financial hardship by relying on their home to help fund their retirement.

A new survey by pension firm Prudential found that almost four million over 55s are planning to downsize in retirement.

Of these, around one in seven (13%) say they couldn’t afford to retire without the additional income. That works out to around 520,000 people.

The research added that a typical downsizer hoped to boost their income by around £112,000 when doing so.

Sums just don't add up

Relying on your home to fund retirement is becoming an increasingly popular strategy – but it's not without risk, as many will find themselves short on cash down the road.

Separate analysis by insurer Royal London in 2016 found that downsizing from the average detached house (worth £310,000) to the average semi-detached house (worth £197,000) would release enough money to buy an annuity that, when added to the State Pension, would result in an annual income of £13,700.

With the average annual wage of £27,400 this would mean a significant slump in income upon retirement.

“Hoping to live off the value of your home could be a ‘downsizing delusion’ for millions of people,” says Steve Webb, director of policy at Royal London.

“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. Even with today’s record house prices, very few people could fund a retirement by selling up and moving to a smaller property.”

High-risk plan

While there is an argument that you don’t need more than 50% of your working income in retirement as you have fewer outgoings – mortgage cleared, no commute costs and so on – there are other problems with relying on your property as your pension.

For starters, you could find when you want to downsize and retire the country is experiencing a period of low house prices. This could leave you facing retirement with a much smaller income than you expected.

You could also struggle to find a suitable property to downsize to; there is a well-publicised housing shortage in many parts of the country.

Finally, you could find you can’t cope with a smaller property. Households in the UK are increasingly multi-generational as people care for elderly relatives and still house children struggling to afford housing costs on their own. This could mean you aren’t in a position to downsize as you intended.

So rather than relying on your home to fund retirement, why not start funneling money into a pension in order to provide a stable income in retirement.


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