Should I downsize to fund my retirement?
We look at the potential pitfalls of rushing into downsizing your home for retirement, and why you shouldn’t assume that your property is your pension.
Last Updated: 6 April 2023
Selling up and downsizing to a smaller home is a serious consideration for many people in later life. It makes sense if you no longer need the extra room, and it could give you extra cash to help pay for your life after work.
But relying solely on your property to fund your retirement could leave you strapped for cash and space.
We delve into potential pitfalls you may not have considered. Plus, give tips on how to bolster your pension to give yourself more flexibility at retirement.
This article isn’t personal advice. Pension and tax rules can change and any benefits depend on your circumstances. If you’re not sure what the best course of action is for your circumstances, please ask for advice.
The benefits of downsizing at retirement
Downsizing can help you free up extra cash to help fund your retirement. If you have a large family home and the kids have flown the nest, you could make a significant profit by selling up and buying something smaller.
The good news is that selling your main home doesn’t normally result in a tax bill, but you could be liable for stamp duty on the new property.
Downsizing could also help you live the lifestyle you want in retirement. If you picture yourself living in the countryside or by the sea, downsizing could free up the extra cash you need to make it happen. Plus, a smaller property is much easier to look after than a house with lots of empty rooms.
The risks of using your property as your pension
While selling up and moving into something smaller could generate extra cash, relying on downsizing for your retirement income has serious risks. The main one being that you might not get as much cash as you expect. This may be partly due to the fact that moving house is expensive. By the time you’ve paid all the legal fees, stamp duty and moving costs, you might find that downsizing wasn’t the lucrative financial venture you’d first hoped.
You can download our guide for a breakdown of the costs and tax implications, as well as a look at the risks and benefits of using your property to fund your retirement.
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 emotional decision that you probably don’t want to rush. 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.
Downsizing shouldn’t be taken lightly. It’s unlikely that you’ll want to give up the family home and uproot your life as soon as you finish work. Especially if you end up moving away from loved ones and there’s no space for them to stay over.
To give yourself more flexibility at retirement, you’ll need a decent pension alongside your property. Having pension savings as a buffer means you’ll have more freedom to choose how and when you retire. It also means that you’ll have more flexibility in whether 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.
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 marginal rate and available up until age 75.
Even if you’re not working, you can still contribute £2,880 each tax year and get £720 as a top up from the government. If you’re working you can pay in as much as you earn (or £2,880 if you’re earnings are less than this). This is capped at the annual allowance, which is £60,000 for most people.
You might want to consider increasing the amount you pay into your workplace pension, or 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 in regularly from as little as £25 a month and make debit card payments online whenever you like.
Remember the earliest you can usually get money out of a pension is age 55 (rising to 57 in 2028), and investments can fall as well as rise in value, so you could get back less than you put in.
If you already have an HL Self-Invested Personal Pension (SIPP), the quickest way to make a payment is online – you just need to log into your account. Please make sure you re-read the SIPP Key Features before going ahead.