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Downsizing at retirement – are pensions safer than houses?

Average house prices saw their biggest annual rise since 2016. We look at the potential pitfalls of rushing into downsizing, and why you shouldn’t assume that your property is your pension.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Selling the family home and buying something smaller is a common way of generating cash. Like nearly one in three people, you might even think of your property as a way of funding your retirement.

If downsizing is part of your retirement plan, with property prices at record highs now might be a smart time to act. In fact, our recent survey found that 1 in 25 people aged 55 and over plan to downsize in the next 12 months.

But what looks like a clear-cut opportunity at first could be more complicated in practice.

Even when the housing market is favourable, there are potential pitfalls and long-term consequences of downsizing. Relying on your property for your pension might not be the best idea.

This article isn’t personal advice. If you’re not sure what the best course of action is for your circumstances, you should ask for advice.

How’s the housing market coping?

Despite economic recession, we’re actually seeing an unexpected boom in the housing market.

  • The average property price is now tipping over £245,000 (up 5.2% compared to last year)
  • Stamp duty has been temporarily suspended on properties under £500,000
  • Mortgage rates are relatively low

Add to this a continued demand for properties with gardens as a result of lockdown restrictions, and it starts to look like a window of opportunity for people looking to sell the family home.

Is now really a good time to downsize?

Once a property is on the housing market, it typically takes 2 to 3 months for a sale to complete.

With both the furlough scheme and mortgage holidays ending in the coming months, the full impact of the recession is likely to feed into the property market. We could see an increase in lenders concerns around repayments and mortgage agreements as well as larger deposits needed from buyers. This could put a dampener on the housing market as a whole and lead to sluggish sales and price falls.

So even if you act quickly, you might well find that the current property boom is short-lived and the ‘downsizing window’ closes before you can take advantage.

The pitfalls of using your property to provide your pension

Nobody knows what the property market will do in the coming days, months or years. But there’s always the risk that you might not get as much cash as you expect by downsizing. In fact, industry research has found that movers aged 50-59 only released around £4,000 cash from downsizing – not exactly a comfortable pension fund.

There’s also more to downsizing than just money – you might find that your decision is more emotionally charged. Like one in three people we asked, you might become put off by downsizing because in reality you’re too attached to your family home. Choosing where you want to live isn’t easy, and overhauling your life to leave a home where you’ve made lifelong memories and friendships can be overwhelming.

Add this to the stresses of moving house in the first place and external pressures (like lockdown today) – what seemed like a great idea at the time might actually present real issues for both your financial and mental wellbeing.

Retirement on your terms – why property shouldn't equal your pension

This isn’t to say that downsizing at retirement isn’t a good idea. It’s just that it’s a complicated and an emotional decision that you probably don’t want to rush into. To give yourself more flexibility at retirement, you’ll need a decent pension alongside your property.

By making your property your main (or only) method of generating money at retirement, you’re tying your financial future to where and how you’ll live. But it’s unlikely that you’ll want to sell your property at the same time you want to finish work.

Having pension investments as a buffer means you’ll have the freedom to choose how and when you retire. It also means that you’ll have more flexibility in when you choose to sell your property.

More freedom with a pension?

If you’re solely relying on your property to cover your retirement, you’ll get a lump sum in one go, but with a pension you can:

  • Take out as much or as little money as you want – giving your retirement pot more chance to grow
  • Control your income and spread out the amount of tax you pay
  • Choose whether you want one-off payments or regular income

If you’d like to find out more about how to take money from a pension, including how it’s taxed, download this essential guide.

Guide to your options at retirement

It’s never too late to boost your pension

Every time you pay into your pension you get a boost from the government in the form of tax relief. This is at your highest marginal rate and up until age 75.

Even if you’re not working, you can still contribute £2,880 each tax year and get up to a £720 top up from the government. Otherwise, you can pay in as much as you’re earning, capped at the annual allowance, which is £40,000 for most people. Pension and tax rules can change and any benefits depend on your circumstances.

You might want to consider increasing the amount you pay into your workplace pension and take advantage of employer contributions. You could also consider opening your own private HL Self-Invested Personal Pension (SIPP) so you have more saved for retirement and more options available than just downsizing. You can pay into a SIPP regularly from as little as £25 a month and make debit card payments online whenever you like. Once held in a pension, money can’t usually be accessed before age 55 (57 from 2028). Investments rise and fall in value, so you could get back less than you invest.

More on the HL SIPP, including the benefits

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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