Downsizing has been a popular strategy for retirees to boost their retirement pots, potentially giving you a cash lump sum if you buy a cheaper home.
However, according to research from Legal & General published in the Financial Times, more over-55s are choosing to stay in their homes, with fewer than one in four households intending to move to a smaller home in the near future.
While the numbers of over-55s planning to relocate may be low, downsizing may still present a viable option for your retirement. Although, of course, as with any financial decision, there are various considerations to make before you take that step.
So, here are four downsizing pros and cons to help you decide if it could work for you.
4 downsizing pros
You could receive a lump sum
The first benefit many people target when downsizing, is accessing the value contained within their home. This can be particularly useful, if the value of your home has risen since you bought it.
UK house prices have hit all-time highs in 2021, meaning you may benefit from a healthy profit on your home when you come to sell.
Typically, smaller homes are cheaper than larger ones. Therefore, by moving to a smaller property, you can access that value as cash. This money could be indispensable in reaching your retirement goals, as it may supplement your pension income or provide you with money to leave a legacy to family.
Research published in the Guardian found that, between April 2020 and the end of June 2021, older homeowners withdrew £830 million from their homes with more than half – £425 million – handed to their children, other family members or friends to help them onto the property ladder.
Smaller homes are easier (and cheaper) to maintain
In general, smaller homes are cheaper to maintain, meaning you are likely to pay less Council Tax and to have lower utility bills. This could be important in retirement when your income generally tends to drop compared to your working life.
Similarly, as you get older, you may need to start thinking about having a smaller home simply from an upkeep perspective. Many of our older clients find that they simply don’t need the hassle of maintaining a large home in their retirement.
You can move somewhere you always wanted to live
Was there an area or neighbourhood that you wanted to live in previously but couldn’t afford the size of home you needed for your family?
By downsizing, you may now be able to afford a property in that area, allowing you to reach a life goal that you previously thought was unattainable.
Additionally, you may want to elect to move nearer to friends or family, now there’s no longer a daily commute.
You could reduce your IHT liability
By transferring money out of your home and into cash, you may be able to reduce your Inheritance Tax (IHT) liability.
We’ve previously written about how we helped a client with a large, valuable property in the Home Counties to reduce a substantial IHT liability.
We can work closely with you to determine how a house move would work, and how funds could be released from the property, gifted, and carefully invested as a means of reducing your estate for IHT purposes.
4 downsizing cons
The costs of moving
While moving to a smaller home can allow you to access value tied up in it, you need to stay aware of the costs of moving home.
Valuation fees, estate agent fees, Stamp Duty Land Tax (SDLT), and removal costs can all add up, reducing the amount you will make when downsizing.
Factor these costs in and check that your move is still cost-efficient.
You’ll have less space
It may seem obvious to say that downsizing will mean you have less space at home, but it’s a key consideration that you should keep in mind.
Having less space at home can be a serious lifestyle change. You might have been used to having separate spaces for different parts of your life, such as for cooking, eating, and relaxing.
However, in a smaller home, you may no longer have this extra space. This could require you to adapt your lifestyle more than you were expecting.
This may be especially true if you work from home currently. You may have had your own home office that was separate enough from other spaces to work peacefully without interruptions from anyone else.
But, in a smaller home, you may now find that you’re less insulated from noise, meaning it’s more difficult to work.
Practical points like this matter too, so make sure you’re willing to change your lifestyle to live in a smaller home.
Leaving your home can be emotional
While it may seem trivial, you shouldn’t underestimate the emotional side of moving home.
You may still live in the same home you did when you first got married or where you raised your children, and you feel sentimentally attached to it.
This is just as important as the practical and financial sides to moving. Make sure you’re ready to leave, rather than forcing yourself to move.
You may lose a support network
On top of the emotional factors associated with moving, another point you may not have considered for downsizing is that moving elsewhere can mean leaving a support network.
Whether that’s being close to your family, friends, or simply just your neighbours that you have a close relationship with, knowing where you can go if you need help can be so important.
This network tends to become even more vital as you get older and start to lose some of your independence.