My house as my pension: Does downsizing really add up?

I often hear people say that their house is their pension and they’re going to downsize to make this happen. On the face of it, this theory seems to make sense. While you have your family at home you have a bigger property, which over the long term goes up in value – this is especially true for those of us that live in London. When you retire, the kids will have moved out (hopefully!), you can sell the big family home, buy somewhere smaller and release the equity to live the life you want.

But the reality rarely pans out like that. If you sell the big family home to downsize, you are unlikely to release as much equity as you think and we have seen that often it’s not enough to make a huge difference to your life long term. There are also significant lifestyle considerations that often get overlooked. If you have planned to use your home as a pension, it may be time for a bit of a reality check. Let me explain.

Downsizing doesn’t release as much equity as you think

When moving house later in life, you may want to stay in the same area and simply buy something smaller. But it’s unlikely you’ll want to go that small – you will still want people to stay and you’re accustomed to space and a certain standard of living. The likelihood is that you will also want to renovate a bit too so the new property is to your taste and meets your needs (that is, unless you’re buying a turnkey property, which will be more expensive anyway). This means that once you have paid off any outstanding mortgage (if any), bought the new house, paid stamp duty, fees and done a bit of work, you may end up with some money, but is it enough to constitute a viable pension pot……

Let’s get some figures down to bring this to life a bit. Let’s say your home is worth £1.5 million. You want to stay in the area but still need three or four bedrooms, so the grandchildren can visit. A house like that costs about £1 million. You owe £250k on the mortgage, there’s over £40k in stamp duty and £15k - £25k in estate agents fees to sell your existing property, the solicitors fees – maybe £5k - and then the work on top of that. If you’re lucky, you’ll get £100k out…..take a look at your annual outgoings and work out realistically how long that would last. Two years maybe? Three if you’re very careful? You can flex these numbers to suit your own models but we have seen a number of examples recently like the above.

Country life is not always the good life

Maybe you’re thinking that you will simply swap your London property for a place in the country or somewhere up the M1, where you’ll get more for your money. This is the one scenario where the financial differentials in property prices can start to make a little more sense. However, from a lifestyle perspective, is this move the right one for you? If you’ve lived your life in London, are you really going to hit 70 and consider moving to Milton Keynes to release some money? Would you inconvenience your life for money? You will still want to see family and friends in London and travelling up and down the country will take its toll time and energy wise as well as financially.

If the family home is in the countryside, perhaps in a rural spot with amazing grounds. You may be thinking that you will no longer want the big garden and it would be good, at a later stage in life, to be walking distance to shops and restaurants versus always having to get in the car. This scenario is particularly tricky financially as moving from a rural area to a more urban or town setting tends to mean you have to pay more for less space. Those we have spoken to in this situation have all ended up spending money to buy their townhouse rather than releasing money. Yes, it has made sense from a lifestyle perspective but not from an equity release point of view.

Your home is unlikely to serve you well as your pension

And what about arranging a formal equity release agreement without selling? Here you will have to shift any mortgage you still own into the agreement and then pay for the equity release over and above that. This might suit you but might not leave the legacy you had hoped for future generations.

Obviously there are circumstances where this can work but generally speaking, your main residence is not the silver bullet for your pension. We don’t think it will be viable enough to release enough money that will then generate enough sustainable income for retirement.

We advise long term wealth creation through diligent saving and investing alongside your main residence for flexibility and options. If this is of interest, please don’t hesitate to get in touch.