Can You Downsize to Fund Your Retirement?

​​For most people lucky enough to own one, their biggest financial asset is their house. And it may have been your long-term plan to sell up in retirement and live off the proceeds. But when it comes to the crunch, could you do it? Our ‘Look before you leap’ checklist will help you get to grips with the decision.

Steve Webb, the former pensions minister, has warned people not to rely on their home to provide money for their retirement. The buoyancy of the UK’s property market has fuelled a popular belief that homeowners can fund their retirement simply by selling their home and moving to a smaller one – commonly known as downsizing.

Webb, who now works for insurance company Royal London, has called this a ‘delusion’. He points out that the average move from a detached house to a semi-detached house would free up only about £113,000. Although this might sound like a lot, it would translate to a retirement income of only around £5,700 a year. Even with the (maximum) state pension added on top of that, this would mean an income of less than £13,800 a year – without adjusting for inflation.

The point is that 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 here. 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.

Look before you leap

Here is your ‘Look before you leap’ downsizing checklist.

1. Move for the right reasons

Remember that you should always move into a home – not out of one. In other words, look at how your new home will improve your life in terms of location, lifestyle, your social circle, amenities, activities and family connections. Do not make money the sole driver of the move – or you may end up having to move again soon and wasting the money you released by downsizing.

2. Factor in all the costs

If it is a long time since your last house move, you may have forgotten what a ludicrously expensive process it can be. When you tot up all the extras (e.g. legal fees, stamp duty, surveyor costs and estate agent fees) the average for the UK is around £12,000. For many individuals this would represent a year’s retirement income, so ask yourself if the move will be worth it.

Also factor in the difference in costs of living in the new property – things like council tax, insurance, energy efficiency and any increased / decreased need to use the car. Often you will be able to save in some or all of these areas, so you could offset these costs against moving expenses.

3. Scout your locations

Retirement is going to be the final act of the movie of your life, so like a film director, you must scout your locations carefully. Don’t choose to move to a place just because you had a nice holiday there – you need to view it through the eyes of a permanent resident, and one whose circumstances may change significantly over time. Ask yourself important questions now, rather than later: will you be able to build a good social life here? Is it the sort of place where your family can easily visit (assuming you want them to!)? Also think hard about the house itself: for instance if you want the grandkids coming to stay, you may still need that spare bedroom.

4. Remember that retirement is a long time

When you were younger, ‘old’ may have meant anyone over 60. Now you know it’s not like that at all. As you enter retirement you may still feel very youthful and active – so the last thing you may want is to move into an area where everyone else is at least 15 years older than you. Instead of jumping too soon, you may want to keep your family home for a little longer until you’re ready for that bungalow by the sea. After all, you don’t want to feel old before your time.

But do give lots of thought to your physical environment. If one of your great pleasures is entertaining, then consider how much space you’ll have in which to do this. Also think long-term. Even if you’re a DIY wizard now, you won’t want a high-maintenance property in your later years.

5. Think about what you’re leaving behind

This can be the hardest part of downsizing and relocating. You’ve built up friends and networks over (probably) decades, and you know the area like the back of your hand. For some people, this may be reason enough to move – but you might not realise what you had until it’s 200 miles away. It can help to discuss your relocation plans among your social circle, and see what your friends are thinking about. It could be that several of you share similar aspirations, and instead of ending up scattered across the country you’ll come up with a plan between you. Time to print those ‘Eastbourne or Bust’ t-shirts?

6. Declutter

No, actually, this is the hardest part. Not only might you have 20 or 30 years’ worth of memories in your family home, but you will also be trying to squeeze all those possessions into a smaller property. This is why you need to start planning well in advance – preferably years. Encourage your children to take the items and keepsakes they want, emphasising that unwanted clutter will end up in a skip! House-clearance sales are another possibility if you are seriously downsizing and/or emigrating. Putting stuff in storage is an option, but it just kicks the problem further down the road.

7. Consider complications

Retirement can be far from simple. Plenty of people past retirement age still have elderly parents who may need long term care. You may want to explore the option of having parents living with you rather than in a care home, which would mean you need a larger property that is also suitable for the purpose. This can make good sense financially, provided you are up to the challenge. It can help to discuss the issue with a financial adviser who specialises in long-term care.

8. Treat it as an adventure

Don’t downsize at all unless you can approach it with the right mindset. Rather than think of it as going to your ‘retirement home’, try to recapture the positive feelings you had when you left home for the first time. Remember that this is you taking back your freedom from work, parenting (mostly) and the stresses of building up your life to this point. Now, finally, is your chance to enjoy it all.

Maybe. If you can see it that way, then go for it. However, if all you can see is what you’d be leaving behind, then moving from the family home may not be for you. Remember that there are other ways to release value from your home, ranging from equity release to simply renting out a room. Also bear in mind that you have plenty of time to change your mind if you decide to wait and see – but if you jump too soon, it will be harder to reverse the decision.

Wrapping up

A financial adviser can be a great help in discussing issues like this, as they will take into account all your circumstances – not just financial ones. If you think you any need help or advice working through your options and putting a plan in place for a happy and fulfilling retirement, get in touch to speak to one of our team of financial planners.

This article first appeared on Unbiased.