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The downsizing delusion

Planning to fund your retirement by selling your home might not be as beneficial as you expect.

Your home might be your castle, but there are good reasons why it shouldn’t be your pension. For millions of workers planning to use their property to help fund their retirement, the reality is downsizing in later life is unlikely to be the financial route to freedom they expect. 

From a lack of adequate funds that your sale might generate, to the stress of moving away from friends and family, downsizing to fund your retirement is fraught with potential pitfalls. Here are some of the things you should consider. 

Do the sums add up for downsizing?

Research from July 2016 by Royal London , a pension company, shows how much retirement income someone might expect to generate by downsizing from a home worth £310,000 to one worth £197,000. If they bought an annuity with the proceeds, they could expect to have around £13,700 a year to live on, including the State Pension.  

This is around half the average UK wage and far below the level of two-thirds of pre-retirement income that many people in the pensions industry say is a good rule of thumb to aim for. 

Even if they used the £113,000 generated as cash to live on, with the average man living an average of 19 years and women 21 years after 65 , this only represents a few thousand pounds a year. This also doesn’t take into account the costs of moving home, and potential renovation, redecoration or maintenance costs on the new house.

“Hoping to live off the value of your home could be a ‘downsizing delusion’ for millions of people,” says Steve Webb, a pensions expert at Royal London, and former pensions minister in the 2010-15 coalition government .

“In most of Britain, the amount of money you could free up by trading down at retirement to a smaller property would generate a very modest income.” 

Can you downsize even if you want to? 

But downsizing is not always as easy as it sounds.  A smaller property can have many advantages – lower household bills, less gardening, no stairs to climb, and closer proximity to local amenities. 

But a house half in size will not necessarily be half the price. Some may even cost nearly as much – if not more – as the property being sold. 

Bungalows, for example, are a particularly expensive option for later-life living. According to property site Zoopla , the average house in the South East of England sells for just over £366,000, while the average asking price for a bungalow is just under £423,000. 

In retiresavvy’s native Yorkshire, the average property sells for around £167,500, while the average bungalow commands just under £194,000 (prices as of July 2017).

Many parents approaching retirement age may find that downsizing to free up capital is not possible thanks to what’s been called the ‘Boomerang Generation’ – the growing number of young people who have moved back in with their parents while saving for a house deposit or to cope with high rental costs.

Figures from Aviva , an insurer, show that the number of adults aged 25-34 living with parents has risen by 37% over a 10 year period, increasing from 903,000 to 1.23 million by 2016. Aviva also found that adults living in the family home expected to be 28 on average before they moved out. 

Don’t forget the social impact 

As well as the potential financial challenges of downsizing, the emotional impact shouldn’t be underestimated. It can be particularly hard to say goodbye to the family home, with all of the memories you have made there. 

The importance of familiarity and proximity to family shouldn’t be underestimated. Couples may have dreamed of moving to a picturesque seaside spot for many years, but a good view isn’t a replacement for friends, family and all that is familiar. 

While you may no longer have to worry about being close to schools and the station, you might want to stay in the local area due to friends and family ties. But thanks to rising property prices, it might be difficult to find something suitable that is affordable and will free up enough cash to retire on.

Anyone planning to downsize will probably also need to dispose of furniture as their new home may not have room. It can be very difficult to part with heirlooms, but see it as a chance to start afresh and maybe make some money from selling your old possessions.

When downsizing, think about decluttering - throw out or sell anything you don’t need or no longer use. This means you can properly gauge how much space you’ll need in your new home. If you rarely use your garage, then you might consider looking for a property without one to save money and space. 

Retiresavvy is brought to you by Skipton Building Society. This article has been commissioned by retiresavvy and any opinions voiced are the author's own.

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