Moving from the family home to a smaller property is the subject of much dinner party discussion among empty nesters. On paper at least, it makes sense to swap that oversized, cash-guzzling house for a more compact place that will free up time and equity for a more comfortable retirement.
For Gordon Attar, aged 60, downsizing was inevitable. “We treated our house as a major part of our pension, so we knew that at some point we would downsize,” he says. In the event, the move happened rather earlier than he had anticipated. Having been made redundant in 2009 from a senior executive position in logistics, he tapped into his love of Porsches to become a specialist trader.
But when the Brexit vote stifled that market, he and his wife Sharan decided to release equity by moving to a smaller home. They switched from their £845,000 Oxfordshire family home, a spacious four-bedroom house with an indoor swimming pool, to a three-bedroom house costing less than £500,000, five miles away. “Both our daughters live locally; our new home is near the village centre and everything is accessible if we are less mobile in 20 or 25 years,” Attar explains.
In the meantime, the £350,000 he released is “easily enough to live off”. Two-thirds is invested in shares paying about a 6 per cent dividend on average, covering costs for the coming years until the couple’s state and occupational pensions kick in.
So downsizing has a lot of attractions. A survey by investment platform Hargreaves Lansdown survey this year found that 22 per cent of respondents planned to downsize, while a further 42 per cent were unsure; only a third had ruled it out.
However, the survey also revealed significant resistance to the idea. When asked what deterred them from downsizing, more than a third said they were too attached to their home, two in five said they had enough money already, a fifth said it was too expensive to move, and 12 per cent felt it was not financially worthwhile.
Making the right choice
When and for whom does downsizing work well, then, and what should you consider in assessing your own position?
“We know from our deal book that downsizing is a much greater reason to move for people in higher property price brackets than in lower ones,” says Lucian Cook, head of residential research at property consultancy Savills. Since the start of 2017 downsizers have accounted for 24 per cent of all Savills’ sellers in the £500,000 to £1m bracket, and about 30 per cent of sellers of homes over £1m.
Not only can such sellers unlock more equity than those in smaller houses, but they are likely to be more concerned about potential inheritance tax (IHT) liability, and therefore interested in releasing cash to give to their families.
On average, Cook adds, sellers in these price brackets have released around 30 per cent of the value of their home by downsizing, with such moves reducing the number of bedrooms from 4.7 to 3.5 on average.
How much might be released? Family homes are relatively well-placed: Savills’ whole market analysis found that while the average profit made from sales over the year to May 2021 stood at £110,000, sales of detached houses netted their owners an average profit of £465,000.
Age-specifically, retirement specialist Churchill Homes recently polled 2,000 people aged 60 plus and calculated that on average people living in family houses could see a potential £150,000 windfall.
That may sound like a lot, but Ed Monk, associate director at Fidelity International, argues its impact depends on how it’s used. “Is this money to boost your regular retirement income? Is it to have a pile of cash for emergencies or special things? Or is it to pass on to the kids or grandkids?”
If an income boost is your goal, work out what it will amount to. “If you were left with £100,000 after downsizing, that would equate to only say £4,000 a year that you could withdraw from a savings pot in a sustainable way,” says Monk.
Buying an annuity to secure income for life purchases only a bit more. As of early September, a healthy 65-year-old who buys a level annuity (with no inflation linkage) worth £100,000 would receive less than £5,000 a year, according to the Retirement Planning Project. And that falls to under £2,700 for an inflation-linked plan.
“This is where the downsizing theory can clash with reality – you have to understand what that extra wealth will translate into and how much difference it will make to you personally,” Monk adds.
Location considerations are key. If, like Gordon Attar, you move from a large detached house in an expensive part of the country to a smaller place, the finances are likely to work well, particularly if you move to a cheaper region. But if you’re downsizing from a smaller property in a less affluent area, the workable options become more limited.
“The reality is that many people would need to downsize to a much smaller home, maybe in a different area, to realise any meaningful gain,” comments Helen Morrissey, senior retirement analyst at Hargreaves Lansdown. “Yet the idea of moving away from friends and family is often a deal-breaker.”
The situation is further complicated by the fact that over the past year such buyers have found themselves competing with younger families keen to escape city life and able to work from home.
Weigh up the costs
It’s crucial, if you’re contemplating a move for financial reasons, to do the sums.
One consideration is the cost of moving, which includes stamp duty on properties above £125,000, conveyancing, removals, an energy performance certificate (EPC) and estate agent fees.
Investment options for your windfall
A key question for downsizers is how to invest the cash released tax efficiently.
If you’re still earning and have not yet taken any more than the 25 per cent tax-free lump sum from your pension, this is likely to be the most tax-efficient destination for the cash released. You can contribute up to the full value of your earnings, capped at £40,000, into your pension annually, as well as carrying forward any unused allowance from the past three years. But most retirees are taking a taxable income from their pension, which means further pension contributions are capped at £4,000 a year.
Separately, if you make capital gains, you can use tax-free quotas such as the £12,000 capital gains allowance, and the annual Isa tax-free allowance, currently £20,000.
“But the tax implications mean it can be complicated, especially for bigger sums,” says Interactive Investor’s Rebecca O’Connor. “So this is a good time to use a financial adviser who can take a holistic view of your finances.”
To get a sense of how these might stack up, Gavin Brazg of house-sellers’ support website The Advisory suggests that selling a £500,000 house would cost about £9,400, while the purchase of a £250,000 bungalow would cost a further £4,100. So any capital gain would be depleted by over £13,500 at the outset.
A further issue, especially for owners of higher-value properties, is the potential IHT liability. For many couples, their home is their biggest asset, so it makes sense to take steps to minimise IHT.
The residential nil-rate band (RNRB) is an additional IHT relief, currently up to £175,000, available to those with assets of more than the standard £325,000 nil-rate band who leave the property to immediate family. It means that couples in this position have up to £1m of IHT relief available, which seems at first glance to encourage them to stay put in their home.
However, says Monk, some RNRB may still be available if they move to a smaller home, though it’s complex and HM Revenue & Customs imposes conditions.
The advantage of downsizing as far as estate planning is concerned is liquidity: if you can afford to, you can gift cash released to children or grandchildren during your lifetime. Such gifts are counted as Potentially Exempt Transfers: provided you live a further seven years after making them, they no longer count as part of your estate. You can also take advantage of the various other IHT-exempt annual gift allowances.
Money is not the only reason to move
Of course, there are various reasons for downsizing, and a move may work out well for reasons other than money.
Peter Goodwin and his wife Amanda, aged 74 and 68, are a case in point. The Bristol-based former crane driver examiner recently sold the family’s three-bedroom semi-detached ex-council house to his youngest daughter, and moved to an apartment in a Churchill retirement community two miles away.
“Although my wife liked the idea of somewhere more manageable, I was quite happy where we were and didn’t really want to think about moving, but our youngest daughter wanted to buy the house she was brought up in, so we agreed we would have a look at some retirement communities locally,” he explains.
Many apartment owners in the place they settled on “seem much older than us”, Goodwin comments. Nonetheless, he acknowledges the move will make a big difference as they get older, especially as their new home is much better served by buses, shops and facilities. “It’s more sensible to downsize now than wait until we become more housebound or immobile,” he adds.
What about the financial outcome? “We sold our daughter the house for £30,000 under the market price, but we have still freed up money to buy new furniture and give us more spending power,” he says. The couple’s two elder children, who are both settled in their own homes, were happy with the outcome, he adds.
Be aware, if you contemplate this route, that the retirement housing sector has been widely criticised with regard to hefty exit and other fees levied by the management groups. Additionally, because units have to be sold to other over-55s the pool of potential purchasers is relatively small, so the eventual sale of the property may be tricky. You can find out more through the campaign group Better Retirement Housing.
Financial considerations often drive downsizing among younger retirees who want the money to improve their quality of life. But those in their mid-70s or older are more likely to be moving because they are infirm, lonely or unable to manage their house, says Amanda Fyfe, founder of the Senior Move Partnership, which helps clients get through such moves. “I’ve very rarely come across people of that age moving to free up money.”
They are also much more likely to move into dedicated retirement schemes where there’s a ready-made social life. “Bungalows are the other manageable option, but they can be much more isolated — there are always people around in a retirement community,” says Fyfe.
The UK trails other developed markets in provision of dedicated accommodation for the elderly. According to ARCO UK, the industry body, around 75,000 people currently live in retirement communities – just 0.6 per cent of over-65s.
But as we live longer and generally stay healthy for more time than past generations, such housing will surely grow in popularity. Fyfe says: “We’re seeing greater demand than we’ve ever seen.”
Alternatives to selling up
It’s clear that while downsizing may often make sense objectively, many people simply want to stay in their family homes, whether because they love it, they can accommodate family gatherings, or cannot face the upheaval of moving. And it’s certainly possible to generate funds from your home without selling.
If you have a lot of equity in your home but little cash to live on, an alternative to moving to a smaller property is an interest-only mortgage. However, most UK lenders impose a maximum age for new mortgages, normally 65 to 70, and require them to be paid off between 70 and 85. At that point you will need to clear the mortgage debt, which might mean selling the property.
Retirement interest only mortgage
Retirement interest-only (RIO) mortgages are relatively new products, mainly available from building societies. They are designed for retirees and have no upper age limits. You are required to pay the interest in full each month, so you need to prove you have sufficient income to cover that. But unlike conventional mortgages, there is no defined mortgage term — the capital doesn’t have to be repaid until you die or move permanently into care. The maximum you can borrow is typically 50 to 60 per cent of your property’s value.
Equity release plans are available to those over 55. Most equity release contracts are lifetime mortgage plans, whereby a debt is secured against your home but (unlike a conventional mortgage) the interest is allowed to roll up until you die or sell the property, making them generally more appropriate for older borrowers.
“Historically, these schemes were inflexible, expensive and rapidly eroded a borrower’s equity in their property. With greater innovation in the market, these are now cheaper, more flexible and a viable option for releasing equity from your property,” says Jonathan Harris, managing director of mortgage broker Forensic Property Finance. Typical interest rates are 2.5-5 per cent, according to equityreleasesupermarket.com.
Also, following scandals in the 1990s, borrowers are protected by new rules introduced in 2004 by the Financial Conduct Authority and implemented by the Equity Release Council.
Equity release can work for those who want to access a lump sum, for example to help a child on to the property ladder. Moreover, provided the cash released is spent or given away, it’s a useful way to reduce an estate.
Many plans now allow for flexible, voluntary payments to the lender. So those who can afford to pay interest monthly can do so and reduce or avoid the interest roll-up.
If you don’t want to borrow and have spare bedrooms, you could consider taking a lodger. The Rent a Room scheme allows tax-free annual earnings of up to £7,500. However, be careful not to breach the covenants of any mortgage or insurance terms.
Also, take advice before renting to more than one lodger. There can be capital gains tax implications when the home is sold, since part of the property could be treated as commercial space.
Renting your home out
It’s possible to let your entire family home and move into a smaller rented property, living off the rent. Again, be sure not to infringe the terms of your mortgage or insurance, and inform providers. Note that the rent you collect may be subject to income tax whereas the rent you pay will come out of post-tax income, so the profit may be limited.
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