In principle, downsizing in retirement, after any children have flown the nest, is often the most financially sensible option for many people. As is so often the case in life, however, there can be a very wide gap between financial theory and real-world practice. Where people are under no financial pressure to downsize, the convenience of staying put can be very attractive.
The advantage of staying where you are
The main advantage of staying where you are is exactly that. You don’t have to find a new home and then go through everything involved with moving. You particularly don’t have to deal with downsizing your possessions, which can be a practical hassle and sometimes an emotional struggle.
The disadvantage of staying where you are
The big disadvantage of staying where you are is that you cannot sell your home and use the funds as you wish. While it is true that there are companies which offer equity release and that this may be a suitable option for some people, this approach is not necessarily as simple as it can sound and it is particularly recommended to get professional advice before going down this route.
As a minimum, remember that equity-release companies are in business to make a profit for themselves and their shareholders and that therefore may not offer you as good a financial deal as you would have got from a standard sale. It’s also worth remembering that someone will need to go through your possession after your death and so downsizing could be seen as an opportunity for you to take control of the process and possibly to make it part of your estate-planning strategy.
The advantage of downsizing
The headline advantage of downsizing is the financial benefit of releasing the equity in your current home and the corollary benefit of being able to give your family (part of) their inheritance early, thus reducing, or even eliminating, the inheritance tax which will be payable on your estate. There are, however, many other corollary benefits worth considering.
Possibly the biggest of these is that you can buy a home which is suited to your current and foreseeable future needs. Remember that although the term “downsizing” rather implies moving to a smaller home, this doesn’t have to be the case. In fact, depending on your plans for retirement, “downsizing” might actually involve moving into a home with an equivalent amount of space, or even more, just for less money. This may seem like a contradiction, but in reality, parents with children at home also often have jobs to go to and so have to think about finding homes in areas which have good commuter links as well as good schools. Retirees without children at home can look at property outside of these premium areas and could also potentially look at “fixer-uppers” and/or buying property at auction. Alternatively, they could use (part of) the equity they release to create income and opt to rent.
Another benefit of downsizing, which could be significant, is that it allows you to reassess your possessions in the light of your future plans and move on what you do not need, thus saving your children the job and reducing the value of your final estate even further.
The disadvantage of downsizing
There’s no denying that downsizing takes work and even if you stay in your current local area, it will almost certainly involve some sort of change of lifestyle. If you’re currently under no financial pressure to move, you could look at splitting the difference and undertaking a “virtual downsize” by clearing out your possessions so you know you could move any time you wanted to and making sure that your home and garden are maintained in sale-worthy condition. Then you can enjoy your current home at its best while knowing you are in a good position to downsize properly later should you so choose.
Your property may be repossessed if you do not keep up repayments on your mortgage.
For Equity release, estate and inheritance tax planning we act as introducers only.
Equity Release refers to home reversion plans and lifetime mortgages. To understand the features and risks, ask for a personalised illustration.
The FCA does not regulate some forms of estate and tax planning
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