Standard Life adviserzone - Cutting Edge Articles - Home as a Pension (April 2008)

April 2008

Paul took a last look at his notes as his new client, Steven Slater, was shown into his office.

Steven had contacted Paul a few weeks ago, and they had already met to discuss Steven’s income, expenditure and current savings. Paul had spent part of the last week considering Steven’s level of savings and spread of investments.

'You have reasonable levels of both short and medium term savings and a good spread of investments' said Paul. 'However, one noticeable omission is your lack of any retirement savings. You mentioned your employer does offer a pension scheme but you chose not to join.'

That’s right' replied Steven. 'I'm not sure I see the point in pension saving. And anyway, I have a large house and I will have paid off my mortgage by the time I am in my mid-50s. That can provide us with income in our retirement if we downsize to a smaller property.'

'Pensions give unique tax advantages' Paul replied. 'I really think you should consider trying to join your employer's scheme if you can.'

'The second issue' continued Paul, 'is whether downsizing your home will give you enough to live off in retirement. Most people need less income in retirement. Many will have paid off their mortgage and will not have costs associated with work. So a good rule of thumb is targeting a pension of around two-thirds of your pre-retirement income, which should provide a similar standard of living in retirement. Standard Life has recently done some excellent research on the income which can be provided by downsizing. I've spoken to them and they have given me some figures relevant to your position.

'You said your detached house is worth £480,000 which is around the average detached house price in the South East region, where you live. The first figures I've done for you assume you downsize to a semi-detached house which is also within the South East. The average semi-detached property is approximately £272,000. You would also have to pay stamp duty when you buy this new house. Taking that into account means you would generate a capital sum of roughly £207,000. There would also be other costs involved in moving – removal costs and legal fees for example.'

'By downsizing you would generate a lump sum of around £205,000. You could keep this money you raise and gradually spend it through your retirement. Or invest it somewhere. Standard Life has compared this lump sum raised by downsizing to the income you would receive from a pension fund of the same size. This gives a notional amount of income that downsizing would give you, if you lived for the average time. Your £207,000 would give you £172 per week. So the question is - would this amount give you enough money to live on comfortably in retirement? To pay all of the bills, and do all the other things you want – to play golf, to go on holidays during the winter.'

'It doesn’t sound a lot' sighed Steven. 'My salary is around £40,000 so I get about £750 per week before tax at the moment. So the £172 per week that you have calculated isn’t anywhere near the two-thirds figure you mentioned earlier. What happens if I downsize to a smaller property?'

'I should also mention that you would get state pension benefits in addition to the amount you generate by downsizing. Currently the basic state pension is around £87 per week and you should also get some benefits from the State Second Pension, the second tier state pension. So you could add on £100 or £120 per week that you would receive from the state'replied Paul. 'I can arrange to get an exact figure for you.'

'If you downsize to a flat, still in the South East, then you would raise more money. The average flat in the South East is worth £181,000. Again taking into account stamp duty, downsizing to this type of property would give you a notional income of around £256 per week.'

'Another way of raising more money' continued Paul 'is to move to another region of the UK. This can obviously be a significant upheaval and many people will not want to move away from friends and family. By selling your detached house in the South East and buying a flat in the South West you could generate an income of £269 per week. However, many of the attractive areas in the South West where people may want to retire to, have house prices which are significantly above the regional average. And moving further afield is likely to increase removal costs. So even this scenario may not be as attractive as it initially looks.'

'Getting a decent income in retirement looks like it is more expensive than I thought' exclaimed Steven.

'Yes, that’s right' replied Paul. 'With many people living twenty five or even thirty years in retirement, you need a significant level of savings to generate a good income. There will always be exceptions, but these figures show that the average person can't rely on downsizing their home to give them a life of luxury in retirement. There is no doubt that property can be a valuable investment, but putting all of your eggs in one basket can be a risky move. Property can be a valuable part of retirement saving, but it should not be the only option used.'

'So you think I should seriously consider joining my employer's pension scheme?' asked Steven.

'Absolutely' exclaimed Paul. 'While pensions are not as accessible as some other types of saving, they do have unique tax advantages. That’s why pensions can be such a valuable part of your overall savings. And if you don't join, you are turning down free money on offer from your employer – he pays 5% of your salary into this scheme. You wouldn't turn down a 5% bonus would you?'

'No, I certainly wouldn't' replied Steven. 'I will ask my employer to let me have details of the scheme, and how I go about joining'.

Andrew Tully
Senior Pensions Policy Manager

Standard Life analysis of UK house price data using the Halifax House Price Index regional dataset for Quarter 3 2007.
Weekly income for a male aged 65, 50% spouse's pension, 3% escalation and a 5-year guarantee. Figures from FSA annuity tables.
Moving costs have been calculated from stamp duty costs only, due to the lack of reliable regional data for removal costs.

Tax and legislation are liable to change. This information is based on Standard Life's current understanding of law and HM Revenue & Customs practice.

Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.

Home as a pension

April 2008