More people downsizing to raise retirement income

Holly Thomas / 30 May 2014 ( 06 July 2016 )

Millions of homeowners over 55 are banking on raising money from their homes through downsizing to boost income in retirement, according to a new study.

Nearly two in five over-55s – up to 2.3 million homeowners – plan to sell their houses and expect to raise around £85,300, according to a report by a major insurance company.

More than three quarters (77%) of the over-55 homeowners who are planning to sell say that they aim to release equity from their home by downsizing.

While the average amount they hope to release is around £85,300, nearly one in ten are expecting to raise £200,000 or more.

Read our downsizing tips.

What are people doing with the money raised from downsizing?

The downsizers are equally as likely to splash out their lump sum on a one-off purchase (42%) as they are to save or invest a sum (41%). Nearly a third are planning to put some of the money into their pension pots.

They also say that they are not planning to keep all the money to themselves. One in eight (12%) plan to use some of the money to help their children get onto the housing ladder while 15% say they will use some of the money to assist their offspring with other financial issues.

Why do people downsize?

The most common reason for trading down cited by 60% of the over-55 downsizers is the convenience and the ease of running a smaller home.

A third say the reason for downsizing is to raise money, while one in five want to save money on the cost of running their home.

Retirement income expert Vince Smith-Hughes said: "Homeowners who have been lucky enough to gain from the long-term strength of the housing market should exercise caution if they are banking on downsizing to be the magic wand that provides a decent retirement income. 

"In some cases the amounts of cash realised can be lower than expected and the cost of moving house should not be underestimated."

Indeed, the research highlighted that the costs involved with moving house are a significant barrier to downsizing – more than a quarter (28%) of over-55 homeowners say they are likely to be deterred from downsizing by the total bill for buying, selling and moving home.

Read our guide to things to consider before downsizing.

Equity release is another option

One alternative to downsizing is equity release, which is popular among those who want to stay in their own home. These schemes allow homeowners to release cash by borrowing against the value of their properties. 

The Equity Release Council’s code of practice includes a "no negative equity guarantee", which means borrowers will never owe more than the value of their property.

Nigel Waterson, Chairman of the Equity Release Council, said: “With the average value of over-55s' homes at its highest point for over three years, there is plenty of incentive for people to consider releasing a proportion of that housing wealth and give themselves greater access to funds in later life.

"Rising house prices help to keep the cost of interest in check and the ‘no negative equity guarantee’ protects them against ever owing more than the value of their home. 

"Involving family members is a key part of the decision making process for anyone taking this step. 

"Advisers who sign up to the equity release code of conduct not only ensure their customers are fully aware of the implications both for them and their family, but also encourage customers to have a conversation with those closest to them before making a final decision."

The changes to pensions and how people can take their retirement income announced in the Budget in March will provide savers and retirees with increased choice when they plan their finances in retirement.

From July next year, anyone who is aged 55 or over will be able to take their entire pension fund as cash – although only the first 25% will be tax-free. 

The remaining 75% of the fund would be taxed at the saver’s marginal rate, rather than the current 55% charge for full withdrawal.

With new avenues opening up, those approaching retirement should consider taking professional financial advice.

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The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.