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News: Householders set for retirement fund shock

A survey out this week reveals a third of Britons expect to use their homes to help provide an old-age income, but many people may fall short as house sales may not give them enough money in retirement.

While a minority of people will be able to downsize their properties and use the extra capital to buy a substantial annuity, selling a home to fund retirement will not be a viable solution for most, according to the preliminary results of a survey by Mercer Human Resource Consulting.

Analysis shows that an average UK house costing £173,000 could be sold to buy an annuity worth about £6,700 a year after tax. But with average annual rental costs at £6,800, this annuity would provide negative net retirement income. Even in the West Midlands, where average rental costs are lowest relative to house prices, annual retirement income after tax and rent would only be £1,900.

The same analysis showed that someone choosing to downsize from an average semi-detached home to an average terraced house would be able to buy an annuity of just £1,100 a year after tax.

Dr Deborah Cooper at Mercer commented: "People with expensive houses who will be able to downsize are unlikely to be those who are relying on their homes as their main source of retirement income. For most defined contribution scheme members, selling a home to buy an annuity will provide little income, if any at all, once rental or re-purchasing costs have been taken into account."

She added: "If people fail to save enough now and rely on selling their homes to provide an income, they could be in for a nasty shock at retirement."

Table of average house prices, annuity values (through sale of house) and average rental prices.
Figures in £s.

 

Average price

Annuity p.a.

Annuity net of tax
at basic rate

Average rent p.a.
2006/7 (estimated)

Net income

UK

173,000

8900

6700

6800

-100

Scotland

114,000

5900

4400

4600

-200

N Ireland

152,000

7800

5800

4400

1400

North England

140,000

7200

5400

5700

-300

North West England

142,000

7300

5500

5300

200

North East England

134,000

6900

5200

4200

1000

Wales

151,000

7800

5800

4400

1400

West Midlands

166,000

8500

6400

4500

1900

East Midlands

154,000

7900

5900

5400

500

East Anglia

167,000

8600

6400

6400

0

South West

185,000

9500

7100

5700

1400

South East

222,000

11400

8500

7400

1100

London

256,000

13200

9900

10200

-300

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