The Downsizing Delusion: Why relying exclusively on your home to fund your retirement may end in tears


By Steve Webb, director of policy

The British obsession with homeownership can have dangerous consequences. A recent survey by Barings¹ found that up to three million people of working age were planning to rely wholly on the value of their home to fund their retirement.

We are not talking about people investing in buy-to-let or planning a bit of equity release post-retirement. We are talking about three million people who are putting all their eggs in their home as a means of funding their retirement. They could be heading for a shock.

Our latest policy paper, 'The Downsizing Delusion', analysed the effect of this strategy for someone downsizing at retirement, from an average detached house to an average semi-detached house, then using the equity released to buy an annuity.

The results were stark

The report shows that, looking across the UK as a whole, 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 UK full-time worker has an annual wage of £27,400. This means their income would slump by half on retirement. In many parts of the country where house prices are relatively low, the income slump would be even greater.

The report also explored several other barriers to this ‘downsizing’ strategy.

The first is that downsizing at retirement may be difficult if the ‘spare bedroom’ is not actually spare. Growing numbers of young adults are living at home for longer because of difficulties in affording their own home or having moved back in after a job loss or relationship breakdown.

The assumption of a mortgage-free property at retirement is also becoming increasingly questionable, with one in three mortgages lasting to 65 or beyond. As a result, some of the equity released by downsizing may be needed to pay off this mortgage debt rather than funding retirement.

The changing dynamics of the property market also play their part. Despite the widespread perception that housing prices are only ever set to go one way, housing markets experience the same peaks and troughs as other investments. This means that potential retirees may have problems if the timing of their planned retirement coincides with a lull in the market and a lower valuation of their home than expected. Furthermore, a lack of suitable housing stock, particularly in rural areas, may mean that there is nowhere to downsize to unless they want to move away from family and friends.

Although the strategy of relying exclusively on downsizing to fund retirement remains a minority preference, it would still appear that millions of people are pinning their hopes on this approach. This report highlights just how much of a gamble this group is taking.

1 Source: Barings retirement survey, published January 2016 based on a summer 2015 ICM survey of approx. 1,500 non-retired GB adults.