Tempted to downsize your home to pay for your retirement? Find out why you shouldn't.
Millions of people are pinning their retirement hopes on a myth. That myth is called downsizing, and if you’re relying on it to fund your pension, you have to come to your senses right now.
Let me be the one to throw an imaginary bucket of cold water in your face. Allow me to give you a friendly metaphorical slap. Far better I shock you into taking action today, than you discover the truth too late.
For most people, downsizing is likely to be a downright disaster.
Down, down, down
Millions of homeowners are relying on downsizing their property to fund their retirement - a mighty 4.7 million over the next five years, according to Investec Wealth & Investment.
Downsizing involves selling your home in retirement, buying a cheaper one, then living off the difference. And for some people, it can work. If you sell, say, a £500,000 executive home somewhere in the south-east and buy a £200,000 retirement nest up north, you might generate enough cash to see you through your final years.
But few people will live up to that ideal. Yet they cling onto the downsizing dream, often as an excuse for their failure to save into a pension as well.
Here are five reasons why your property is no substitute for a pension.
1. It’s an effort
Moving home is hard work, and it gets harder as you get older. You are selling up years of memories and contacts. You have to pack up a lifetime of stuff. It’s a huge emotional upheaval, especially if you are moving from family and friends. Do you want to put yourself through this? Plenty can go wrong, given that One in five property sales falls through.
2. The sums don’t add up
Downsizing won’t generate as much cash as you think. The property market is not dead, but it is poorly. Outside of prime London, buyers are in charge. People are nervous, finance is tight, and you might take a knock on the price. Worse, an aggressive buyer could beat down the price at the last minute, especially if the survey throws up problems.
Moving home is also expensive. The average estate agent will trouser 1.5% of the sale price - that’s £4,500 on a £300,000 property. Legal fees, removals costs and stamp duty on your new property quickly add up. Your total costs could easily exceed £10,000, and that’s £10,000 less pension for you.
3. Buying is expensive
Once you’ve found a buyer, you need to find a new home. The pressure is on, and plenty can go wrong. Four out of 10 downsizers overspend on their new home, often after falling in love with a pricey property, according to Investec. Just 14% come in under budget. Bungalows and retirement flats are more expensive than you think, partly due to demand from 4.7 million downsizers. All too often, downsizing turns into samesizing, as people resist moving to a much cheaper home.
Once you’ve bought your new home, you will probably want to upgrade it. New kitchen? That could cost you £10,000. So could a new bathroom. Even minor alterations can lead to major bills. Again, the sums don’t add up.
If you rent instead, you don’t have to worry about maintenance and repairs. But your rent could rise over time, eating into your savings, and you are at the mercy of your landlord.
4. You’re going down
Downsizing has a nice, cosy ring to it. You might picture yourself moving into a snug cottage, stylish apartment or practical granny flat. The reality may not be as picturesque.
People typically like to move up the property ladder - not down. Moving up implies a nicer home, in a nicer area, with nicer shops and nicer neighbours. If you are downsizing, you are heading in the other direction - down. Worse, once you have downsized, you can NEVER afford to upsize again.
5. The money won’t stretch far
The cash you raise won’t stretch as far as you think, thanks to high inflation and low interest rates. The average downsizer generates just £43.50 a week retirement income - just £2,262 a year, according to Standard Life. And that’s after going through one of the most stressful things in life, namely buying and selling your home.
Don’t delude yourself
Downsizing can work for some. For most, it is a dangerous myth, especially if you use it as an excuse to backslide on your pension or Isa savings.
Your property isn’t your pension, it’s your home. Don’t delude yourself by confusing the two.