Downside to downsizing
BEING a homeowner in later life gives you a financial edge as you don’t have to pay rent and you also own a major asset whose value has shot up thanks to dramatic house price growth.
However it can also be a burden, especially if you own a large family home and the kids have fled the nest.
Two in three say they would consider downsizing to a smaller home in retirement, but others say they are too attached to their home, while some are worried about the cost of moving, according to research from Hargreaves Lansdown. Senior analyst Nathan Long said downsizing may be a great solution for older homeowners who have banked a big profit but you also have to watch out for costs: “You will be liable to pay estate agency fees when selling, as well as legal fees, stamp duty on your new property and removal costs.”
Popular downsizing options such as a seaside home or bungalow may be more expensive than you think, in part due to demand from downsizers.
“Once you add renovation and improvements on the new property, you may end up with less than you expect,” Long said.
Emotional issues also play a part: “Few people relish leaving an area where they are comfortable, and a home with a lifetime of memories.”
The upsides of downsizing include lower ongoing costs, cheaper energy bills, less hassle and maintenance and the chance to live where you want.
If you do generate a lump sum from downsizing, you have to decide what to do with the cash. “Money left in a savings account will be eroded by inflation, so you may have to invest in stocks and shares, which is riskier.”
One option is to invest it in a pension, Long added: “Provided you are under 75, you may still claim tax relief on contributions, even if you’ve stopped working.”
Non-earners can pay in up to £2,880 into a pension each financial year and the Government will automatically add 20 per cent tax relief – worth up to £720 – on top.
Nick Sanderson, chief executive of luxury retirement village builder Audley Group, said if downsizing try to maximise the return on your property: “Maintaining or upgrading your home, or adding extra space by converting your loft or garage into a new room, can all boost its market value.”
Andrew Morris, senior equity release adviser at specialist later life adviser Age Partnership, said another way homeowners can raise cash from their property is to take out an equity release scheme: “This allows homeowners to raise tens of thousands of pounds free of tax or generate a regular monthly income.”
A big advantage is that you still own your home and retain the right to continue living there for life.
You do not have to make any repayments on an equity release lifetime mortgage, either. “Interest on the loan rolls up and the debt is repaid from the proceeds of your house sale after you and your partner either die or go into care,” said Morris.
Once the equity release debt is cleared you can pass on the remaining property value to your loved ones as an inheritance in the usual way, he added.