Two in three will consider downsizing in retirement: What are the pros and cons?

Two in three people say they will consider moving to a smaller home to help fund their retirement, a new study has found.

Younger people, Londoners and higher rate taxpayers were the most likely to have downsizing plans, according to research by Hargreaves Lansdown.

In total, just over one in five people said they were certain they wanted to downsize in retirement – but the study found that older people became more reluctant as the decision drew nearer.

For those who don’t want to downsize, two in five say they’re too attached to their home.

Whilst one in four 18–34-year-olds say they planned to downsize in retirement, only 15 per cent of those aged 55 and over said they intended to move to a smaller home.

Of those who didn’t want to downsize, two in five said it was because they were too attached to their home, whilst one in five people were worried about the moving costs.

Nathan Long, senior analyst at Hargreaves Lansdown, said those approaching retirement needed to consider their options carefully. 

‘Done right, downsizing is a great solution for a wealthier and less stressful retirement,’ he said. 

‘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, 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.’

In terms of geography, Londoners were much more likely to want to downsize than any other region in the UK, as 36 per cent had 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,’ said Long.

‘Plus, there’s the lure of moving to the countryside or seaside once you’ve finished working in the capital.’

Higher-rate and additional-rate taxpayers were twice as likely as basic-rate taxpayers to be planning to downsize, according to the research.

This was thought to be related to higher earners having bigger more expensive homes, which they could draw enough cash from to downsize comfortably. 

‘Those with smaller, cheaper homes will find it more difficult to downsize and free up enough cash to make much of a difference to their retirement savings – once moving costs and stamp duty are deducted,’ added Long.

Moving somewhere smaller can have financial benefits

Moving to a smaller home should in theory free up cash, unless you are opting to downsize to an area with higher property prices.

Although you may need to pay stamp duty when you purchase a new property, there should be no tax liabilities when selling your current property.

When selling your home, you are entitled to principal private residence relief which should, in most cases, shield you from capital gains tax that might eat into any house price gains since you purchased the property.

There should also be lower maintenance costs and cheaper energy bills when living in a smaller property, which will save you money.

One in five people are worried about the moving costs associated with downsizing.

A new property may be more suitable for retirement – for example, a bungalow could be better than a two-storey house if you think the stairs might become an issue in later life.

Alternatively, a flat in a town centre may make more sense than a house in the suburbs or the countryside due to its proximity to the shops and other services.

By downsizing and freeing up excess cash you may put yourself in a better position to enjoy your retirement.

‘Downsizing can play a sensible role in retirement, if you already have enough guaranteed income to cover your basic costs,’ said Long.

‘Money released from your home can be used alongside any cash you draw down 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.’

… but downsizing also comes with risks  

There is no denying that moving home can be a huge emotional wrench, regardless of whether the timing makes sense.

It often involves compromise – perhaps either a smaller property or a less desirable area – but above all it requires change, which can be unsettling.

Moving home is stressful at the best of times and this can be intensified by the time it takes you to sell, often exacerbated by collapsing chains, gazumping and conveyancing delays.

Moving home is also a costly business. You have estate agency fees, plus conveyancers, surveyors and mortgage costs, not to mention stamp duty on purchases. 

‘The amount freed up when downsizing is surprisingly low, once moving costs, fees and taxes are paid,’ said Long.

‘Plus any renovation and improvements required on the new property must also be taken into account.’

For those intending to use downsizing as a means of funding their future retirement, there are also other risks to think about.

‘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,’ says Long.

‘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.’

Where to save a lump sum from downsizing

Downsizers might be tempted to keep their money in a bank account, which means there’s a good chance their pot of cash will be eroded by inflation and gradually become worth less and less.

The rate of inflation rose to 2.1 per cent in May on the back of a surge in fuel prices, food, drink and clothing.

If inflation were to rise by 2.1 per cent over the next 10 years, the actual value of £100,000 would fall by nearly a quarter, meaning £100,000 would be worth the equivalent of £81,235 in terms of purchasing power.

‘Most people underestimate the length of time they’ll spend in retirement, so they don’t realise quite how much impact this can have,’ said Long.

‘As a rough rule of thumb, in retirement it usually makes sense to have between one and three 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. 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.’

Downsizers might also consider paying some of the money into their pension, as provided they’re under 75 they can still get tax relief, even if they have 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 20 per cent tax relief of up to £720 on top,’ said Long.

‘But if you have already taken some money out of your pension 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.’

An alternative option to downsizing?

For those who are keen to avoid moving home in retirement but require extra funds to support them, equity release is an option – though not without its risks. 

One in 20 people plan to release equity instead of downsizing, according to Hargreaves Lansdown.

Equity release unlocks the value built up in your home, allowing you to access it in the form of tax-free cash.  

The money can be used to clear debts, to help younger family members onto the property ladder, to make home improvements, or even just to head off into the sunset for the holiday of a lifetime. 

This is then repaid through the sale of your property when you pass away, or go into long-term care. 

However, borrowers will also need to pay back interest, which can mount up to large sums if the plan is held for many years – and it means they will leave less of an inheritance for their loved ones.  

Equity release: How it works and where to get advice

This is Money has partnered with Age Partnership, a firm of independent advisers who specialise in finding retirement mortgages and equity release that works for you. 

>> Find about equity release and get advice   

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