There was a major downturn in the housing market in 2008 as many people know to their cost. This just goes to demonstrate that, like any other form of investment, values can go down as well as up. It’s therefore important to avoid relying solely on your home to provide you with a pension. Diversity and balance is the key and whilst you might consider your home to be your family nest, it’s not always a good idea to put all your eggs in it.
There are different reasons for downsizing and it may be that you just want somewhere smaller that is cheaper to run and more manageable from a housekeeping perspective. However, if you are looking to release some capital to supplement your pension you may have to consider moving to a cheaper area. Very often a smaller property, perhaps a care home or a bungalow, is not going to be any less expensive than your current home. Also, don’t forget running costs if you move into a care home or perhaps a flat – management charges can be a substantial outgoing that tends to keep pace with inflation as a minimum. If you take a long lease in an older apartment block, you may get hit for a share of major capital expenditure, like a replacement lift or a new roof.
Moving to a less expensive area may not be quite as simple as it sounds. And it is never the only consideration. Are you looking for a better climate? Does that mean the drastic step of moving abroad? What about family and friends, health service, transport, social facilities for making new friends.Moving abroad to say France or Spain for the climate is a massive undertaking, both emotionally and financially. The cost of living might be cheaper initially, but can change quite quickly. Your pension is paid in sterling, but your expenditure is going to be in euros. Over recent times, this has been a major problem for sun-seeking pensioners as they have watched their spending power decline as the pound‘s value plummeted relative to the euro. Many pensioners in Spain have also seen their property values fall to such an extent that they can’t afford to sell and find themselves in a double dilemma of not being able to find a buyer for their property and seeing their standard of living fall at the same time. Of course, it’s not all bad news and there are a great many advantages to moving abroad, but you must consider all the options and not just react to that holiday ideal.
Our main focus on this site is economics, but you also have to consider emotional issues when it comes to downsizing your property. You want to be as sure as possible that you are not going to feel isolated. That idyllic cottage in a French hamlet might look great as you drive through on holiday,but is it miles from anywhere and are there other English speaking people in the neighbourhood if you don’t speak the language? What facilities are available to follow your hobby or make new friends? How will you and your spouse cope with separation from family and friends? What happens if you are forced to give up driving? So many questions that only you can answer.
Back to the economics. A major factor is going to be the cost of selling, buying and moving. We won’t go into details of costs here because they can change so quickly, especially with a government strapped for cash and constantly altering taxation. At the time of writing, if you are selling a house for £250,000 and buying one for £150,000, you’re going to be looking at close on £8,000 worth of costs in total.
Looking at the whole package, the main advantage of downsizing as opposed to some form of equity release (see our separate article) is that you realise the full value of your home and not just a smaller percentage. The money you get is also tax free if you are selling your main home.
If you have invested in a second home or you have a buy-to-let property and you are selling this, then you obviously avoid the necessity to move, but you will probably be liable to capital gains tax. CGT is going to take a big lump out of the proceeds.
There’s a lot to think about when you consider downsizing and we hope that we have given you a few pointers. It’s a great idea to take a sheet of paper, draw a line down the middle and then write all the pros on one side and all the cons on the other. You have to be scrupulously honest.
As we have often said before, when it comes to matters of finance, you should always take professional advice prior to making any irrevocable decision.
Retirement Revenue Summary
- Try not to have all your assets in property
- Consider moving to a cheaper area
- Don't forget varying exchange rates if you move abroad
- Consider all the options and don't just go for the holiday ideal.
- A major factor is the cost of selling, buying and moving
- Have you considered equity release as an alternative?
- Write down all the pros and cons on paper and be honest.
- Get professional advice before making any decisions