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Could downsizing help fund your retirement?

Could downsizing help fund your retirement?

Category: Retirement

Updated: 25/09/2014
First Published: 25/09/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

If you're approaching retirement, there's one thing you need to make sure above all others – that you've got enough funds to enjoy your golden years in comfort. While this can be achieved through careful saving during your working life, you may find that you're sitting in an even bigger retirement asset as we speak – your house!

Downsizing could be a great way to unlock some usable cash that could be put to fantastic use throughout your retirement, particularly if you're lucky enough to have paid off the mortgage already. It could provide a valuable income boost and mean that your property becomes your pension, unlocking valuable capital that could bulk up your retirement fund substantially.

For some, the thought of selling the family home and living in a smaller space won't be that appealing, while others will jump at the chance. If your children have flown the nest, you've probably got a few spare rooms that never get used, and if you add in the maintenance costs and higher heating bills of running a larger home, you could well be considering your options. Then there's the sheer amount of cash you can unlock through downsizing…

The cash injection

According to research from MGM Advantage, 12% of retirees surveyed plan to downsize in the next five years, while 18% have already done so. And they could be sitting on a tidy sum as a result: according to their calculations, the average amount of cash released through moving from a detached property to a bungalow, after taking into account stamp duty and moving costs, is an impressive £102,8512.

This figure represents an 18% increase in the amount of cash released compared with just a year ago, when the average was £84,776, thanks to rising house prices and the relative increase in value of a detached property compared to bungalows.

As ever, there are significant variations, and those in Greater London (perhaps unsurprisingly) came out on top, by unlocking an average of £295,593 through downsizing. Those in Wales didn't fare so well, with the typical amount of cash released totalling £54,301, but really, even this is a significant sum and could dramatically improve your finances in retirement.

The numbers not only show how many people are planning to downsize to provide an income boost, but also highlight how much of a boost they could get. However, it's important to remember that even this method of income generation doesn't come without risk, as Andrew Tully of MGM Advantage says: "The old adage of all your eggs in one basket still holds true, [and] careful planning and consideration should be given before making the move."

Equity release: the downsizing alternative

If downsizing really isn't for you, there could be an alternative – equity release. This method allows you to stay in your home while still freeing up some of the cash held within it, and it could prove to be a viable, and profitable, option.

According to figures from the Equity Release Council, over-55s who use equity release can generate the equivalent of 18 months of retirement income. In the first half of the year, customers' initial equity withdrawals averaged £40,467 (excluding London), which equates to approximately 18 months of post-tax retirement income for pensioner couples – or almost three years' worth for single pensioners.

And, if you didn't use it as your sole form of income – which ideally, you wouldn't – it could last even longer, providing you with a valuable income stream throughout retirement. Londoners could again benefit even more: here the typical house price and amount of equity released is the highest, making the initial income boost even greater, equating to four years of net income for pensioner couples or a whopping nine years for single pensioners

Nigel Waterson, chairman of the Equity Release Council, commented: "The path to financial security in retirement is still clouded in uncertainty for many people, but property wealth stands out among the most valuable assets available to UK homeowners.

"Saving enough to enjoy a good quality of life has become increasingly hard as living costs have taken their toll on our ageing population. But many are finding that the option to unlock housing wealth can provide the financial boost to enjoy a comfortable retirement, while still leaving significant sums for other use.

"Opting for equity release is a decision to consider carefully, [but] these findings show that for a growing number of people, the numbers add up to a better quality of retirement and provide an answer to many financial challenges."

The importance of preparation

So, could downsizing or equity release be for you? Either could provide a significant income boost in retirement, but no matter which route you choose to go down – and even if neither of the above appeal whatsoever – it's still important to be ready.

Research from Paragon has revealed that retirees will need an annual income of £14,631 to meet their essential living costs with a bit of discretionary expenditure, and that's already above the average UK pension income of £13,006. Add that up over a typical retirement of 20+ years and you'll see how important it is to be prepared, so if you haven't started planning for retirement yet, now's the time to do so.

Start building up your savings reserves as soon as possible, either through a savings account, a workplace pension or (ideally) a combination of the two. Or, if you want a real cash injection, consider downsizing or equity release when the time comes – consult our no obligation equity release service to see if this could be an option – and above all, be prepared!

What next?

Check out our retirement guides

See our equity release plans

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.