Should I downsize in retirement?

The question of whether or not to downsize in retirement is something many people consider when they’re reviewing their retirement plans. It could be that the family home feels too big now that your children have moved out, or you need a smaller one-storey property for mobility purposes. With a larger house comes greater expenses, and you may wish to reduce living costs by downsizing. You may also be looking to use the cash from the house sale to fund other retirement goals or considering a move abroad.

It can be difficult to know what the right decision is for you, so professional guidance can be beneficial. In this blog, Mortgage Advisor, Stephanie Thayer, Financial Planner, Ian McKenzie and Director (Belgium office), Ed Read Cutting, look at the potential pros and cons of downsizing and the options you can take.

The downsides to downsizing

If you have suitable capital to keep you going in retirement, you don’t need to consider downsizing. However, if your intention is to downsize and use the funds as a future pension, you need to be aware that the downsizing process usually comes with several risks and costs.

Firstly, you may not always get the figure you have in mind when selling your property, so there’s a risk in losing your family home for a small profit. There’s also a lot of upheaval in moving house, it can be regarded as one of the most stressful things to experience in life. Would your family be able to assist you when the time comes? These factors have to be considered when planning your move, especially as you reach an older age.

Family time

Depending on your family structure, downsizing to a property that fits just you, or you and your spouse/partner, may not be the best idea if you have a large family you want to spend time with. You may have grandchildren you’d like to care for, potentially for long periods of time over the holidays. It is prudent to consider the space needed for this if time with family plays a big part of your retirement plan.

There’s also an emotional aspect to consider. You may find you have a strong emotional attachment to your family home which can make it difficult to part ways. If this is the case, you may want to consider an equity release in your retirement planning. With this option, you can benefit from the tax-free lump sum received on your home whilst remaining in it until you die or move into care, saving on the financial and emotional stress of moving.

Equity release does impact the value of your estate, and the amount left to go to any beneficiaries, so consulting with a financial planner is always advised. You would also need to seek independent Legal advice if you ever looked to commit to Equity Release.

Financial considerations

There are a number of costs to factor in if you are intent on downsizing:

Stamp duty

There will be tax to pay on a new UK property if it costs more than £250K in England & Northern Ireland, £145K in Scotland and £225K in Wales.

Legal costs

The legal fees you incur are generally calculated based on the value of the property you are selling and the property you are buying. The more expensive the property, the higher the legal fee (although these can vary a lot by firm). Remember to use a well-respected firm – cutting costs in legal services isn’t recommended. You will also have disbursement costs to consider as well such as Land Registry and Search fees.

Estate agent fees

Estate agents usually charge 1-3% of the sale price, and you typically pay them after the sale. There may also be supplementary costs to promote your advert online.

Survey costs

There are also survey costs to consider when downsizing. Most people will want to instruct a survey of the new home before purchase, especially if this is an older building.

Property market

The property market is impossible to time and predict. There is the risk of losing money or paying more for something than you intended.

Property is an illiquid asset. If you can’t find a buyer, all the value remains on paper and not in your bank account. If you are relying on downsizing to make up most of your pension pot, be mindful that it only takes a small change in the property market to effect value, and you may not get the money you initially expect.

Your property, therefore, should not be relied on for your overall pension fund.

The benefits of downsizing at retirement

On the flip side, your decision to downsize might be purely comfort driven. The idea of a smaller home can be a better fit for your retirement lifestyle. Some people choose to stay in the same area they currently live in, but it’s also common to relocate in retirement, with dreams of living by the sea, the countryside or even somewhere abroad.

A smaller space can also be helpful as you get older, as there should be less physical maintenance required. There could also be mobility issues in later life where being on one floor is essential – a bungalow or a flat with a lift becomes a more practical choice.

Financial considerations

From a financial perspective, most people downsize their property to increase income in retirement by unlocking the equity. If you are still paying a mortgage and you downsize to a smaller/cheaper home, you may be able to clear the mortgage debt completely which could free up considerable monthly income. Despite the costs you may incur through the sale process mentioned above, the lump sum you make on selling your home is usually tax free. Running a smaller household should effectively be cheaper too, in terms of other bills and expenses.

Downsizing and moving abroad

Your retirement plans may see you taking downsizing one step further and moving abroad. Becoming an expat is a big decision that comes with its own lists of financial and emotional pros and cons, on top of those relating to your property. This is where all-inclusive global financial planning can really benefit you.

Firstly, you must spend some time researching where you want to downsize to. However, the chances are you may have holidayed or have a property there already and know exactly what to expect. Downsizing abroad could mean exchanging the memories made in the family home to creating new happy holiday memories when family visit.

Secondly, there are two other issues to fully appreciate – the first being any tax implications of buying a property overseas (and please note that you do not automatically escape UK inheritance tax). Property taxes vary from country to country, as do estate laws. In many countries they include ‘forced heirship’ rules where on death, assets must go to children and you cannot pass to your spouse in entirety. As you enter the later phases of your life, some research and planning should be carried out here in terms of your wishes after death.

There are also the currency implications. If you have a budget for a foreign property based on the value of your current home at a specific exchange rate, then do add in a margin in case of any changes in exchange rates or a house price fall. It is possible to buy a forward contract to lock into today’s exchange rate for house sale proceeds you will receive in the future, again, consulting a professional is advised.

How we can help

Downsizing must be carefully evaluated before you commit to it for your retirement journey. A dedicated financial planner can build a detailed plan with you to ascertain the costs involved and what your net proceeds would be in downsizing, with cashflow modelling tools available to demonstrate sustainability of income in your retirement.

It is essential to carefully evaluate your financial needs, personal preferences and long-term goals before taking any steps. You can contact our team for further guidance.