If done right, downsizing can be a great solution for achieving a wealthier and less stressful retirement. But that doesn’t mean it works for everyone. Let’s break down the pros and cons of downsizing in retirement.
What is downsizing?
Downsizing in retirement is when you sell the home you live in and move to a smaller one. Or it could mean buying a similar-sized home in a cheaper area.
The idea is that the price difference between the two homes releases some money that can help towards your retirement.
A recent study by Hargreaves Lansdown found that two-thirds of people consider downsizing in retirement. Of that, 22% are fully committed to the idea, while 44% aren’t sure.
But is downsizing the right thing for you? Let’s take a look.
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The pros of downsizing
There are certain things about downsizing that make it look like an attractive option on paper. As Nathan Long, senior analyst at Hargreaves Lansdown, explains, “You can borrow money cheaply with a mortgage at the moment, buy a large house, and if property prices rise, bank a significant profit”.
So let’s break down the advantages to downsizing in retirement:
- The initial move will free up cash.
- Your ongoing costs and energy bills should be lower.
- A smaller home could be more manageable.
- The new property may suit your stage of life better (e.g. a bungalow could be more suitable than a two-storey house).
- You can choose an area that suits you and isn’t tied to a work commute.
If done correctly, then downsizing could play an important role in your retirement planning. If you have enough guaranteed income from things like your state pension and an annuity/final salary pension, then the money released can help you enjoy a comfortable retirement.
The cons of downsizing
There is an emotional element to downsizing. Many can’t imagine moving to a new area or giving up the family home.
But there is also a financial impact. And if things don’t go to plan, you could find yourself with less money, less space and less flexibility than you anticipated.
Let’s look at some of the risks of downsizing:
- It could involve compromises: either a smaller property or a less desirable area.
- You might not be ready to downsize at the point you need the money.
- It could take longer than expected to sell your existing home.
- You may not be able to sell your property at the price you want or need.
- High house prices could mean that you free up less cash than you expected.
- Moving is costly. You will have to factor in estate agent fees, legal fees, mortgage costs, removal costs and stamp duty.
- It may be too much of an emotional wrench at a time when your life is already in flux.
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Final word
Downsizing in retirement is purely a personal decision. For some, it can be a sensible part of a retirement strategy. But for others, it may be too emotional or the financial advantages may not stack up.
If you do decide to downsize, then it is worth thinking about what to do with the pot of cash. As a general rule of thumb, it makes sense to have one to three year’s worth of expenses in cash savings during retirement.
Therefore, the remainder may be better in stock-market-based investments. Or you could consider paying some into your pension. If you are under 75, you’ll still qualify for tax relief.
Just watch out for the money purchase annual allowance (MPAA) if you have already taken money out of your pension (bar the tax-free lump sum). The MPAA limits the amount of money that can be contributed to your pension if it has been flexibly accessed. This means you’re restricted to paying in up to £4,000 a year in total, including tax relief.
