Your house is no substitute for saving for your pension

Strong house-price growth combined with falling annuity rates is affecting the way that savers plan to fund their retirement, according to a new report from pension provider Royal London. In 2013, 5% of the UK's working population intended not to save for their retirement through a pension, but to release capital by downsizing to a smaller property. This year, the figure has soared to 8% (some three million people).

It can make sense to take your houseinto account when planning for your retirement for many of us, our house will be the biggest asset weown. However, putting too much weight on the ability to unlock some of the value of your house and to use it to pay your retirement costs is unlikely to be wise.

For a start, you may well free up less cash than you expect once you take into account the cost of the smaller house you will need to buy or rent to replace it. According to Royal London's calculations, an average UK worker who receives a salary of £27,400, downsizing from an average detached house (worth £310,000) to an average semi-detached house (worth £197,000) and using the proceeds to buy an annuity would secure an annual income, including state pension, of £13,700.

Start your trial of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

In effect, their income would drop by half after retirement. The size of the drop is most acute in regions that have lower property prices. In the capital, downsizing could provide 66% of the average worker's pre-retirement wages. But in Scotland, Wales and Ireland it could add up to as little as 45%.

However, money isn't the only concern. There are a number of practicalities that you'll need to take into account if considering selling your house in return for retirement income. For starters, you may find that you still have grown-up children living in the family home at the point that you need to unlock equity.

There's a chance that you might still be paying off your mortgage a third of mortgages now last to age 65 or beyond. And the process of downsizing may not be as simple as you expect: house-price trends may not be favourable when you come to sell, or there may be a shortage of supply making it difficult to find a suitable property in the area that you'd want to live in.

It's also worth bearing in mind that when the time comes to sell, you may not want to move to a new house particularly later in life when you could probably do without the upheaval. "The idea of downsizing sounds sensible enough if you are in a property which is too big for your needs," Patrick Connolly of Chase de Vere tells the Financial Times. "But a downsize [means] you're effectively being forced to sell your home, which might have huge sentimental value to you."

Moreover, saving into a pension comes with a host of benefits. You'll have an immediate leg-up through tax relief, and employer contributions will add a significant sum to your final pension fund. The chances are that you'd be better off focusing your energy on your pension and, if you do decide to sell your house later in life, you'll be in for an additional uplift when the time comes.