The downsizing delusion

According to our policy paper, The downsizing delusion, a growing number of people are planning to fund their retirement not through saving into a pension, but through investing in their own home. Their plan is to downsize to a smaller home when they reach retirement, freeing up a large cash sum to sustain them in their later life. But Royal London's former Director of Policy Steve Webb explains why downsizing may not always be the best choice for those approaching retirement.

See how downsizing affects people in later life

STEVE WEBB: One of the things we think about a lot at Royal London is what’s going to happen to us all later in life: thinking about pensions, and provision for having a comfortable style of living when we’re no longer working. And something very important to people is their house. Very often, later in life we’re going to think about whether our house is bigger than we need, [and] many people talk about downsizing. Often we find that the house is just too big, or perhaps we want to move to somewhere a bit more manageable if we’re struggling to get up the stairs and things like that. So, downsizing is an ordinary part of later life.

But some people take that downsizing idea a bit further, and say actually my entire retirement is going to be based on downsizing – the house I’ve lived in all my working life, I’m going to move somewhere much smaller, free up some cash and I’m going to live off the cash, and that’s something we understand about 3 million people today are planning to do, and we’re very concerned that that might be the state for people.

So, we produced a report last summer called The downsizing delusion – there’s a bit of a spoiler alert there in the title as to what we concluded – but what we looked at first of all is whether downsizing is going to be realistic for people and one of the things we found is that people are, for example, having children later in life, which means when they’re ready to downsize perhaps in their 60s, that empty nest isn’t so empty anymore. So you’ve still got people in those spare bedrooms and you can’t just throw them out and trade down.

We’ve found that people are working much longer and later, so the idea that you could stop work perhaps in your early 60s and trade down, actually many people are working much longer than that, and so retirement is a much later process than people thought.

And perhaps one of the biggest barriers to downsizing is this sort of psychological problem, which is this is your house, you’ve invested heavily in it, you love living there, you’re about to spend more time in it, and then just at that point you’re supposed to sell up and move to somewhere much smaller, perhaps further afield, even if you can find somewhere suitable.

So there’s all sorts of practical barriers, but there are financial barriers as well, and the thing that the report did was try to say well realistically how much would you get? If you say the average detached house is worth say £300,000 or so, and you traded down to a typical semi worth, say, £200,000 that gives you a pot of money of a little over £100,000 – sounds like a lot! But remember you’re going to be retired perhaps for 20 odd years and if you use the £100,000 to buy an income let’s say of £5,000 or £6,000 a year – that’s not much to live on. So even on top of a State Pension, someone on the average wage would see their living standard potentially falling in half if they relied just on the proceeds of downsizing.

So the moral of the story as it were from our analysis is that in most parts of the country, actually the chances of being able to live on the proceeds of downsizing are very limited. So, there’s no problem with downsizing because you need to – you’ve reached that stage in life – but relying on just the house you live in to provide for your retirement feels to us like a worrying strategy.

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