Downsizing rather than saving into a pension is a gamble that rarely pays off and is more likely to leave people short of money when they retire, according to new research. A study estimates that more than 3 million homeowners shun saving into a pension in favor of downsizing to a smaller property – but the strategy rarely ends well.
The evidence comes in a report called The Downsizing Delusion from Royal London, one of Britain’s leading pension providers. The company found that the average retiree sought to downsize from a detached home worth £310,000 to a semi-detached house valued at £197,000. The intention was to invest the cash freed up by the move to bolster income during retirement.
Sinking the proceeds into an annuity plus the state pension only provide £13,700 a year when the average annual salary in the UK is £27,400.
The firm’s director of policy Steve Webb said: “The amount of money freed up by trading down at retirement to a smaller property generates a 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 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 to fund retirement is an incredibly risky strategy.”
The report also identifies several lifestyles and financial events that may hamper downsizing and throw retirement plans into disarray.
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Problems could include children or other dependants living with retirees stopping downsizing to a smaller property; the trend for the over 55s still having a mortgage or other debts that could impact on the cash available from downsizing; property prices not offering the envisioned profits and another home not being available.
The report findings also revealed that downsizing does not replace the average wage anywhere in the UK. The regions where downsizing comes nearest to hitting the target are London (66% of average wage) and the South East (61%). Scotland offers the lowest replacement income value at just 46% of the average salary.