Is downsizing in retirement a good idea?

Everything you need to think about before downsizing your home

Written in line with our editorial policy.

For those of us approaching retirement, downsizing can be a practical solution to help free up capital and reduce ongoing living costs. But is it always the right move?

Moving to a smaller, more manageable property is a popular way to access some of your home’s equity to supplement retirement income. It can also offer significant lifestyle benefits too.

According to data released in June from Saga, nearly one in five of the UK’s over-50s homeowners have downsized. It equates to almost four million people, or an average of almost 200,000 downsizers a year.

But downsizing isn’t always going to be a suitable way to access money in retirement. Sometimes it may be better to stay where you are and look for alternative solutions.

To help you decide if downsizing might be a good option for you, we’ll be discussing the following:

• What is downsizing?
• Why might you downsize?
• When downsizing might be a terrible idea
• Should I rent or buy after downsizing?
• Things to consider when downsizing
• Alternatives to downsizing in retirement

Please note: This article is provided for information purposes only and does not represent financial, mortgage or investment advice. If in doubt, you should seek independent financial advice. 

What is downsizing?

Downsizing is the process of moving to a smaller, more manageable home, often during retirement or when you are approaching retirement. Alternatively, it can mean moving to a similar home but in an area with lower property prices. 

Homeowners typically downsize to free up equity from their home, providing finance for day-to-day living, travel, hobbies, supporting family, or any number of other reasons. It can also reduce living expenses, lower home maintenance costs, or involve a move into a more accessible home like a bungalow.

Why might you downsize?

If you are currently considering downsizing in retirement, here are some of the things you could potentially look forward to by moving into a less expensive home.

Financial flexibility 

One of the most appealing aspects of downsizing is the opportunity to free up equity from your current home. According to a downsizing article by RightMove, homeowners of five-bed houses without any outstanding mortgage who downsize to a three-bed home, could make an average of £498,687 in cash before moving costs.

The sums are even bigger for homeowners living in London. Here, downsizers are apparently pocketing an average of £1,062,087 when they sell their five-bed home and move to a three-bed.

The extra cash you get from downsizing could allow you to:

• Increase your retirement income.
• Pay off debts or your existing mortgage.
• Fund home modifications or care needs to help you stay in your own home for as long as possible.
• Afford more holidays or upgrade your car.
• Help out your loved ones financially with an early inheritance.

But as well as potentially releasing a lump sum in equity, downsizing might bring other benefits:

Lower utility bills and maintenance costs 

Smaller homes generally mean lower utility bills as heating, cooling and electricity costs often drop. Downsizing to a modern, energy-efficient home could further reduce monthly expenses.

According to RightMove, downsizing from a five-bedroom less energy efficient EPC E rated home to a three-bedroom more energy efficient EPC C rated home could save a huge £3,806 a year in energy bills.

There may also be a reduction in property maintenance and upkeep expenses, which can be burdensome in retirement.

Less maintenance stress 

For retirees, maintaining a larger home and garden can become physically challenging over time. Downsizing to a property with fewer rooms, smaller outdoor spaces, or even single-story living can reduce the physical and emotional strain of home upkeep. It can make daily life more manageable and give you more time to do the things you want in retirement.

Moving closer to loved ones

If you live in an isolated area or quite a distance from your family and friends, moving to be closer to them could make all the difference in your retirement. 

Living near to your loved ones offers emotional and practical benefits, helping to combat loneliness and foster stronger support systems. It allows for more frequent visits, shared activities, and assistance with daily tasks, enhancing well-being and creating a deeper sense of belonging and security during retirement.

According to data from Saga, around 25% of grandparents spend an average of 36 hours providing care each month. With that in mind, some downsizers move to a home that is closer to their loved ones to spend more time caring for their grandchildren.

When downsizing might be a terrible idea

The potential financial and practical benefits of downsizing in retirement are clear. But it’s not always the right choice, with some potential mistakes to bear in mind:

Overestimating how much you’ll save by downsizing

Be careful to do your sums before moving so you don’t overestimate how much money will be freed up by selling your home.

Expenses such as estate agent fees, stamp duty, legal costs and removals can substantially reduce the financial benefit of downsizing. In fact, the average cost of moving house in the UK is around £10,000 according to Unbiased. In some cases, the additional costs can leave people with much less profit than they hoped.

In addition, popular homes for downsizers such as bungalows and retirement apartments can be surprisingly expensive, so moving may not free up as much equity as you thought.

If leaving your home is too upsetting for you

Selling a home that you’ve lived in for decades can be emotionally taxing, especially if it’s full of family memories. For many, the idea of leaving the home they love and parting with sentimental belongings when downsizing to a smaller space can feel overwhelming. 

We’re not saying this is a reason not to downsize. However, it is something to consider.

Moving from your support network

Moving away from a familiar neighbourhood or community can also mean distancing yourself from long-time friends, neighbours and family members. This could lead to a reduced support network, which is especially important as you grow older. 

You might find that proximity to your family and friends becomes increasingly important in older age. So if you’re planning to downsize, consider the location carefully to ensure you don’t feel isolated. 

Should I rent or buy after downsizing?

The decision to rent or buy when downsizing your home really depends on your financial situation, lifestyle and future plans. If you value flexibility and want to avoid the responsibilities of property ownership and maintenance, renting may be a good option. 

In addition, many retired living properties are rental apartments or houses. This option could suit you well if you are looking for a property that offers greater social connections to people your age, with greater security and easy access to home help.

On the other hand, long-term financial security, the potential for property appreciation or leaving all or some of your home as an inheritance might be important to you. In that case, buying might be a better choice.

Here are some of the pros and cons of renting vs. buying for you to mull over:

Things to consider when downsizing

If you’re contemplating downsizing as part of your retirement strategy, here are a few things you will need to assess before making your decision:

Location, location, location 

When choosing a new property, think carefully about its location. Consider proximity to essential amenities such as healthcare facilities, public transport and shopping centres. 

It’s also wise to consider whether you want to remain near family or relocate to a different part of the country, such as a rural or coastal area, for a change of pace. You can search for properties in the area you wish to live in using sites like RightMove and Zoopla.

Consider the costs 

If you want to downsize for financial reasons then start by getting a valuation for your current home and compare this to the price of homes you would be happy living in. 

Next, consider the extra costs. You’ll need to factor in moving expenses, estate agent fees, and possible renovations or modifications to the new home. 

Get estimates for everything you’ll need to ensure that downsizing provides enough financial gain to justify the expenses. Saga has written a useful guide on the true costs of downsizing, which details everything to consider.

Downsizing and inheritance tax (IHT)

It’s important to consider how downsizing might impact the inheritance tax on your estate, as this will influence the tax your beneficiaries may have to pay after your death.

Currently, the inheritance tax-free threshold is set at £350,000. However, if you leave your home to your children or grandchildren, you can increase this amount by using the Residence Nil Rate Band (RNRB), potentially raising the total tax-free allowance to £500,000 (or £1 million if a couple). This can significantly reduce or even eliminate the inheritance tax liability for your beneficiaries.

In cases where you downsize or sell your home but still want to take advantage of the RNRB, there is a ‘downsizing addition’. This provision allows you to claim the RNRB even if your new home is less valuable or if you no longer own a home when you die.

This downsizing addition ensures that your children or grandchildren can still benefit from the full tax-free allowance, provided certain conditions are met. This can be a useful tool for those who wish to live in a smaller home while ensuring they maximise the tax benefits for their heirs.

Please note: this explanation is for information only – you should consider taking professional financial advice on inheritance tax matters.

Future-proof your home 

As you age, your housing needs are likely to change. Look for properties that are already ‘future-proofed’ for retirement, such as those with fewer stairs, wide doorways and accessible bathrooms. Bungalows or ground-floor flats can be ideal for long-term living, ensuring that your home remains practical as you grow older.

Declutter and simplify 

Downsizing may require reducing the number of possessions you take with you to your new home. Consider donating, selling or giving away clothes and other items you no longer need through charity shops, eBay, Facebook Marketplace and Vinted. But remember to give yourself plenty of time so you don’t feel rushed.

Alternatives to downsizing in retirement

If the emotional and practical challenges of downsizing seem too daunting, there are other ways to access cash in retirement without moving. 

Options such as equity release or retirement interest-only mortgages (RIOs) allow you to tap into the value of your home while continuing to live there.

Equity release

Equity release allows homeowners aged 55 and over to unlock tax-free cash from their home’s value without needing to sell or move. 

The most popular option is a lifetime mortgage, which allows you to access the funds you need without making monthly repayments. Instead, the interest accumulates, and the loan and interest are repaid when the property is sold, either after you pass away or when you move into long-term care. 

However, it’s important to understand the long-term impact. Equity release reduces the value of your estate, which will affect the amount you can leave behind for heirs. Additionally, equity release can affect your eligibility for means-tested benefits, so it’s crucial to seek professional advice.

Retirement interest-only mortgages (RIOs) 

A retirement interest-only mortgage also allows you to unlock a tax-free lump sum from your home’s value, but you must pay the interest on the loan monthly. The loan is repaid when the property is sold, usually when you pass away or move into long-term care. 

This option can suit those who are comfortable making monthly payments during retirement but still want to remain in their home.

Is equity release or a RIO a viable alternative to downsizing for you? 

If you are a homeowner aged 55+ then equity release or a RIO could help you to achieve the financial boost you may be looking for, without having to sell the home you love.

To explore these options, contact our friendly team at 0808 178 3055 or request a call back for a time that suits you. Our selected advisers will be happy to check your eligibility, look for the best equity release rates from leading providers and tell you how much money you could unlock.

Sources

1-in-5 over 50s have downsized AND grandparents providing childcare: Is downsizing the right move? Saga research shows the popularity of downsizing and the top considerations for homeowners. Saga. Accessed 10/09/2024.

Amount homeowners can unlock on average by downsizing: Downsizing could unlock half a million in cash for empty nesters. Rightmove. Accessed 10/09/2024.

Average cost of moving home: Does it make sense to downsize? Unbiased. Accessed 10/09/2024.

Downsizing and inheritance tax: Downsizing your home in retirement. Money Helper. Accessed 10/09/2024.

About Clare Yates. With over a decade’s experience writing about later life financial planning, Clare offers a wealth of knowledge about equity release, pension annuities, wills, LPAs and more. When she isn’t writing, Clare likes to spend her time baking and going on walks with her husband, two children and their rescue dog. Follow Clare on LinkedIn