Five reasons not to rely on your home as retirement income

Just under half (47%) of homeowners over the age of 55 plan to downsize to smaller homes later in life, according to research from Prudential.

With almost four million people looking to trade their current home for a more manageable space, it is perhaps surprising that less than one third (28%) are motivated by financial gain. In fact, the main reason, given by 74% of people is the convenience of running a smaller home. (Source: Prudential)

Let’s focus on the 28% though, who believe that their house is the key to a financially secure retirement, as well as anybody in their 30s, 40s and 50s right now, who look forward to cashing in on their property in later life.

Unfortunately, in my view at least, it’s unlikely to work out the way you think. Here’s why:

1. Expectation vs reality

The research from Prudential shows that people planning to downsize in later life expect to free up an average of £122,000. That’s a nice lump sum, but not life changing and certainly not enough to retire on.

At current interest rates, if you were to put that amount into a savings account you would be lucky to generate much more than £1,500 per year. As we said, not exactly life changing and certainly not enough to retire on.

However, even that amount could be eaten up without careful planning, as moving to a new house brings its own expense. According to Saga, a couple downsizing from a four-bedroom house, to a two-bedroom could expect to pay just under £30,000 within the first year of downsizing. That includes estate agent fees, Stamp Duty, moving in and renovations / home improvements.

Remember too, these things usually go over budget.

Worryingly, Prudential’s data shows that 13% of people believe that they will not be able to retire without downsizing. Unfortunately, it is unlikely that the profit made from downsizing will be enough to provide an income for the rest of your life.

2. Trapped equity vs generated income

If your home is to help fund your retirement, you need to find a way of using it to create an income. One option is to downsize. However, we have already established that isn’t the panacea that many believe it to be.

People often mistakenly think of their home as an income producing asset. But any move will continue to trap equity in a property, rather than generate an income.

3. The other options aren’t much better

No matter how you plan to use your home to provide an income in later life, there will be considerable downsides:

Letting out spare rooms: The government’s rent a room scheme allows you to do just that, with any income you generate up to £7,500 per year (£3,750 if you are letting jointly) tax-free. However, sharing your personal space with strangers might not give you the most peaceful environment for retirement. It also has added risks which come with the responsibility of being a landlord.

Releasing equity: Equity release as it’s formally known, allows you to borrow against your home, either in the form of a lump sum or income. Interest isn’t paid monthly as it is with a traditional mortgage, but added to the capital outstanding. Therefore, over time, the debt will rise, reducing the equity in the property. Consequently, reducing the amount you can leave to loved ones when you die. Equity release is without doubt a last resort for most people and should only be considered after carefully discounting all other options.

4. The emotional stress

For many people, the transition into retirement is a rollercoaster of emotions. For every exciting notion of having more free time, there’s a pang of anxiety about losing touch with former colleagues and finding a new purpose can often be difficult.

Retirement is a major adjustment and involves breaking a weekly routine that many people have stuck to since their first day of school. It might sound easy to simply stop waking up early and leave the nine-to-five behind, but the reality is often much harder. After all, humans are creatures of habit.

Studies have shown that retirement can have a negative effect on both physical and mental health, which could be increased by being forced to sell your family home, with all the associated memories, to fund retirement.

5. You may need to make uncomfortable compromises

There are numerous people who want to downsize but can’t because:

• There’s a lack of suitable housing (38%)
• They can’t justify the cost of moving (24%)
• They have found that house prices are too high to make downsizing worth it (17%)

(Source: Prudential)

A Knight Frank report shows that a potential two million (25%) over-55s are considering downsizing into ‘retirement housing’; i.e. homes which have been purpose-built and designed for retirees.

That sounds ideal. However, the same report shows that retirement housing makes up just 2.5% of current housing stock; approximately 715,000 properties were available in August 2017. This means that you could end up in a home that is not suited to your needs or in an area you weren’t planning on living in.

The top reasons given for considering downsizing as an option to create income in retirement are:

• Boosting retirement funds and improving standard of living (60%)
• Travelling more (47%)
• Helping children to buy a house (13%)
• Giving the cash directly to children (14%)

(Source: Prudential)

It’s pretty clear that relying on your home as a retirement income is not the ultimate solution that many believe it to be. For most people, selling their home will not generate a sufficiently large income. Unless you are a very extraordinary case, selling up in retirement seldom pays off.

Your home or property may be repossessed if you do not keep up repayments on your mortgage. Home reversion plans and lifetime mortgages are complex products. To understand the features and risks, ask for a personalised illustration.