Millions risk downsizing nightmare of retirement poverty

Pensioners who plan to use the value of their home to fund their retirement instead of a pension can expect a slump in their standard of living, a report has warned.

Many older people plan to live off the proceeds of selling a family home and moving to a smaller one. Picture: Feverpitched
Many older people plan to live off the proceeds of selling a family home and moving to a smaller one. Picture: Feverpitched

People who plan to downsize and use equity in their home to pay for their retirement may find they have less than half of the average annual wage.

In Scotland, the picture is among the worst in the UK, with money generated from downsizing paying for just 46 per cent of a typical annual salary for over 65s.

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The average person downsizing from an average detached house, worth £235,000, to an average semi-detached house, worth £147,000 and using the proceeds to buy an annuity would secure an annual income – from annuity plus state pension – of £12,500. However, the typical full-time worker in Scotland has an annual wage of £27,400.

UK-wide, the figure is slightly higher, at 50 per cent of average salary.

Steve Webb, director of policy at Royal London, which compiled the study, 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.”

He added: “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.”

Meanwhile, experts warned many people who were planning to downsize will be unable to do so due to adult children staying at home longer.

“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; downsizing may be difficult if the ‘spare bedroom’ is not spare,” said the report.

“If you have invested heavily in your family home, you may not want to move out of it to a far smaller property just at the point when you would be spending more time in it,” the report said. “Surveys suggest that out of larger family homes reed up by those over pension age, five out of six are released because of the death of the owner – only a tiny minority are freely downsized.”