Using your home to fund your retirement

IS your home a place to raise your family, or an investment to fund your retirement?

Given all the changes involving pensions in recent years, using the cash locked up in your property can be a tempting prospect, particularly if you don’t have a decent pension to fall back on. A small but growing proportion of people are choosing to ‘downsize’ to a smaller property, and use the proceeds to fund their later life.

Yet, according to new research from Royal London, up to three million people of working age who hope to use the value of their home rather than a pension to fund their retirement could be in for an unpleasant surprise.

The study found that for the vast majority of people this is likely to lead to a slump in their standard of living when they stop work.

The report shows that, in the UK, 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 the typical full-time worker has an annual wage of £27,400. This means their income would slump by half on retirement.

Steve Webb, director of policy at Royal London, said: “In most of Britain, the amount 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.

“Even with today’s record house prices, few people could fund a retirement by selling up and moving to a smaller property. House prices can be volatile, and depending on the value of a single asset – your home – to fund your whole retirement is an incredibly risky strategy.”