As you approach retirement, you might start thinking about your goals and what you want your lifestyle to look like. This includes your living situation, and you may need to decide whether you’ll stay in your current home or perhaps move elsewhere.
According to Saga, almost one in five over-50s have downsized, with most saying they moved into a smaller home to reduce their expenses. The second most common reason for downsizing is to free up wealth from the property.
You might be considering downsizing yourself if you want to increase your retirement savings, or if you think a smaller home might suit your lifestyle. However, there are some potential downsides to consider.
Read on to learn some pros and cons of downsizing in retirement.
Downsizing could significantly boost your retirement pot
One of the key benefits of downsizing is that you could unlock a significant amount of wealth to add to your retirement pot.
Research reported by Today’s Conveyancer reveals that property owners outside of London could unlock an average of £498,687 by downsizing from a five-bedroom to a three-bedroom house.
As house prices vary, the amount you could generate from downsizing is different depending on where you live. The following table shows the potential gains in different areas of the country:
Source: Today’s Conveyancer
These profits could enable you to enjoy a better quality of life in retirement, if you added the funds to your existing savings.
Your expenses may be lower in a smaller home
As well as releasing a lump sum to contribute to your savings, downsizing could also reduce your monthly expenses in retirement.
For example, it might be cheaper to heat a smaller home, and you could make further savings if you move into a more energy-efficient property.
Figures from Rightmove show that the average annual energy bill for a five-bedroom detached house with an efficiency rating of D is £3,658.
In comparison, if you moved into a three-bedroom detached house with an energy rating of B, you’d pay an average of £1,012 a year.
As well as saving on energy bills, you might find that maintenance is more affordable in a smaller home. This is because it’s estimated you’ll spend between 1% and 4% of the home’s value each year on maintenance.
Consequently, by downsizing, you could reduce your living expenses, meaning you can spend more of your retirement income on holidays, eating out with friends and family, or enjoying your hobbies.
There are additional costs associated with buying and selling property
When deciding whether downsizing is beneficial or not, you may need to consider the additional costs associated with buying and selling properties.
Naturally, the total cost of buying a new property varies depending on the size and value of the house, and the location. However, according to Saga, you may need to pay:
- Estate agent fees – 1.42% of the property value plus VAT
- Conveyancing fees – average cost of £2,038
- Survey costs – typically between £400 and £1,000 depending on the size and condition of the property
- Moving costs – average cost of £800 to move a three-bedroom home 15 miles.
Additionally, you will normally pay Stamp Duty when purchasing any property worth more than £250,000. This will cost:
- 5% on the portion of the property’s value between £250,001 and £925,000
- 10% on the portion of the property’s value between £925,001 and £1.5 million
- 12% on any value exceeding £1.5 million.
These costs could reduce the profits from selling your home. In some cases, if your home has significantly increased in value, downsizing may still be worthwhile. However, if you only have a relatively small amount of equity in your home, downsizing may not be as profitable as it first appears.
A smaller home might not suit your lifestyle
If you’re downsizing to fund your retirement, you may focus on the potential financial benefits. However, you might need to consider whether a smaller home suits your lifestyle too.
For example, if spending time with family is a priority for you in retirement, you might want more space for people to stay, or a large garden where the grandkids can play. In this case, downsizing may not fit your lifestyle.
On the other hand, if you plan to travel the world and won’t spend much of your time at home, you may benefit from a more affordable, low-maintenance property.
Additionally, your home may be filled with lots of amazing family memories such as your child’s first words or important birthdays. As a result, the prospect of moving could make you feel quite emotional, and this might influence your decision.
It may be worth considering whether you will genuinely regret moving or if it’s worthwhile because downsizing makes it easier to achieve your dream retirement.
You might feel strongly that you don’t want to leave the family home, regardless of the potential benefits. In this case, you could explore alternative ways to build more wealth for retirement, such as equity release.
Get in touch
If you’re considering downsizing, we can discuss the pros and cons to help you decide whether it’s the right choice for you.
Email hello@fcadvice.co.uk or call 0333 241 9900 for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Equity release will reduce the value of your estate and can affect your eligibility for means-tested benefits.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
