Can you downsize to fund your retirement?
28th October 2016
FOR those fortunate to own their home this is usually their biggest financial asset. It may have been your long-term plan to sell up in retirement and live off the proceeds, but when the crunch comes, could you do it?
General advice is not to rely on your home to provide money for retirement, even though the buoyancy of the UK’s property market over the years has inspired a popular belief that homeowners can fund their retirement simply by selling their home and moving to something smaller.
This is commonly known as downsizing. Others call it a delusion.
The average move from a detached house to a semi-detached one would free up only about £113,000, and although this might sound a lot, it could translate to a retirement income of only around £5,700 a year. Even with the maximum state pension added, this would mean an income of less than £13,800 a year – without adjusting for inflation.
Property alone is unlikely to be enough to fund your needs in later life. A pension is by far the best way to save for retirement, beating even the healthiest property market thanks to generous tax relief and compound interest over many years.
That said, there is no doubt that downsizing can free up valuable funds for retirement, provided that you view this as a supplement to your pension, rather than your main source of income.
However, if you are considering a move to a less costly home in order to boost your retirement income, bear in mind that money is not the only factor. Before you make any decisions, take time to consider all your circumstances and how you might be affected by such a move – because it won’t be easy to reverse.
Don’t make money the sole driver, or you may end up having to move again soon and wasting the money you released by downsizing.
When you tot up all the extras (like legal fees, stamp duty, surveyor and estate agent fees) the average moving costs for the UK total around £12,000. For many individuals this would represent a year’s retirement income, so ask yourself if the move will be worthwhile. It may be cheaper staying put and employing a gardener for example, if this is getting too much for you.
Also, if you want grandchildren to come to stay, you may still need that spare bedroom.
The last thing you may want is to move into an area where everyone else is older than you. Or maybe you’ve already bought those red trousers. You don’t want to feel old before your time.
You’ve built up friends and networks over the years, and you know the area well. You might not realise what you had until it’s 200 miles away. Is it really time to print those “Sidmouth or Bust” T-shirts?
Decluttering is the hardest part. Encourage your children to take the items and keepsakes they want. Emphasise that unwanted clutter will end up in a skip.
And there are other ways to release value from your home, ranging from equity release to simply renting out a room.
No responsibility can be accepted for any actions taken or not taken after reading this article. In all cases suitable professional advice should be sought.