Two in three consider downsizing in retirement: avoid getting backed into a corner

Nathan Long, senior analyst at Hargreaves Lansdown, comments on the findings of an opinion poll carried out by Opinium of 2,000 people for Hargreaves Lansdown, which shows two thirds consider downsizing in retirement.

Key findings from poll:

• Only a third of people (34%) said they definitely don’t want to downsize in retirement.
• One in five people are sure they want to do it (22%) and 44% aren’t sure.
• It’s more common among the plans of younger people, Londoners and higher-rate taxpayers.
• For those who don’t want to downsize, the main reason is that they’re too attached to their home (38%).
• One in five people are worried about the moving costs associated with downsizing
• One in 20 people plan to do equity release instead.

Nathan Long comments: 

“Done right, downsizing is a great solution for a wealthier and less stressful retirement. But if you don’t plan carefully, you could end up backed into a corner, with less money, less space and less flexibility than you need.

“On paper, downsizing may seem to make sense financially. You can borrow money cheaply with a mortgage at the moment, buy a large house, and if property prices rise, bank a significant profit. It’s also tax-free to sell your main home and downsize, although you will be liable for stamp duty on the new property. 

“However, moving home in later life is an incredibly emotionally charged decision. Few people relish leaving an area where they are comfortable, leaving a home in which they have built up a lifetime of memories, or moving to a smaller house where there is no room for the grandchildren.

“It’s one reason why the older we are, the less likely we are to be keen on the idea. While 24% of 18–34-year-olds say they plan to downsize in retirement, this drops to just 15% of those aged 55 and over, as the decision to move draws closer and we realise how much of a wrench it’s going to be.

“Downsizers who are relying on it to fund retirement also face serious risks. You can’t be sure property prices will be high enough when you come to retire, that you’ll be able to sell when you want to, or that you’ll make enough money for it all to be worthwhile. The amounts freed up when downsizing are surprisingly low, once moving costs, fees and taxes – plus any renovation and improvements on the new property – are taken into account.

“For some people, downsizing can be a very sensible part of a wider retirement strategy; but it pays to think carefully where it fits in your overall plans, so you’re not utterly reliant on it to make your retirement finances work.”

Our plans

Londoners are much more likely to want to downsize – 36% have it in their retirement plans. This owes something to the fact that Londoners may be on higher earnings and have more expensive properties, so it is easier to free up cash by downsizing. Plus, there’s the lure of moving to the countryside or seaside once you’ve finishing working in the capital.

Higher-rate and additional-rate taxpayers are twice as likely as basic-rate taxpayers to be planning to downsize. Again, this may be due to higher earners having bigger homes. They may be banking on moving to a smaller property when they retire. In contrast, those with smaller, cheaper homes will find it more difficult to downsize and free up enough cash – once moving costs and stamp duty are deducted – to make much of a difference to their retirement savings.

The benefits of downsizing:

1. The initial move will free up cash.
2. There should be lower ongoing costs and cheaper energy bills.
3. There’s likely to be less hassle and maintenance.
4. The property itself may suit you better: a bungalow could be better than a two-storey house.
5. You can choose an area that works for you. Perhaps the previous area made sense for your commute to work, but now you’re happy to move somewhere with more space,

The risks of relying on downsizing:

1. It can be a huge emotional wrench at a time when our lives are already changing enormously.
2. It involves compromises: either a smaller property or a less desirable area.
3. You might not be ready to downsize at the time you need the extra cash.
4. Or you might feel you’re too old to move at the point when you need more money.
5. It might take far longer to sell than expected.
6. You may not be able to sell your property at your preferred price.
7. If there’s a lack of supply of the type of property that you’re looking for, this will push prices up, so you free up less cash than expected.
8. Other unknowns include taxes and regulation: who knows how much stamp duty you’ll have to pay.
9. Moving is expensive. Estate agent fees, legal fees, mortgage costs and removal costs can all take a massive chunk out of the money you were hoping to raise by downsizing.
10. You’ll probably want to make some improvements and adjustments to make your new home more suitable for your lifestyle and to your taste, which will eat into your profit too.

A more sensible role it could play in retirement

Downsizing can play a sensible role in retirement, if you already have enough guaranteed income to cover your basic costs. This can include the state pension, an annuity and/or a final salary pension. Money released from your home can be used alongside any cash you drawdown from pensions to enjoy more of what you want in retirement. You could put that money aside to help pay for luxuries, like a nice holiday each year, or earmark it for a big purchase like a new car or funding a new hobby.

What to do with a downsized lump sum

If you’ve downsized, you might be tempted to keep the money in a cash account. The trouble with this approach is that over time there’s a good chance your pot of cash will be eroded by inflation, so gradually it will be worth less and less. Most people underestimate the length of time they’ll spend in retirement, so they don’t realise quite how much impact this can have. There’ll also be more temptation to spend it if you leave it sitting in your current account.

Instead, it’s worth weighing up what you already have and what you need this money to do for you. As a rough rule of thumb in retirement it usually makes sense to have 1-3 year’s worth of expenses in cash savings – plus any money you’ll need for planned expenses over the next five years.

For money you’re planning to hold for longer, stock market-based investments may well make sense, because while the value of your investments will fluctuate in the short term, over the long term, stock markets have more potential for growth than cash.

You could also consider paying some of the money into your pension. Provided you’re under 75, you can still get tax relief, even if you’ve stopped working. If you’re a non-earner or earning less than £3,600, you can pay in up to £2,880 each tax year and the government will automatically add up to £720 (20% tax relief) on top. If you have already taken some money out of your pension (bar the tax-free lump sum) before adding your downsizing cash, watch out for the money purchase annual allowance. This means you’re restricted to paying in up to £4,000 a year in total, including tax relief.

Kindly shared by Hargreaves Lansdown

Main photo courtesy of Pixabay