After you're retired |
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How to downsize in retirement By Jeff Salway
If you are not familiar with this scenario, there's a good chance you will be one day: you spend years trying to 'upsize' to your dream home, but when you retire you find council tax and utility bills have risen above inflation, By GE Life's reckoning, 60% of people will receive a lot less money than they expected when they retire, while research from Fidelity International has found the typical household sees their income drop by 50% in retirement. So, unlocking cash from your biggest asset - your house - is the obvious way to fund your retirement. Easy isn't it? But, if your house is the panacea to your retirement worries, how do you actually get your hands on that money? This is a question being asked by a growing number of people as the baby boomer generation approaches retirement. This group alone has equity worth £543 billion tied up in property. It also represents some of the 13 million people who, according to Prudential, will use their property to fund at least part of their retirement. Super-downsize me? So how do you go about using your house to fund your retirement? Equity release schemes have become increasingly prominent in recent years, but downsizing remains the most popular way of freeing equity from your home. A recent survey by propertyfinder.com revealed that while two-thirds of house hunters are upsizing - seeking somewhere more expensive than the one they are selling - a third are 'trading down'. On average, this enables them to release £112,000 of equity. Compared with equity release schemes, selling up and buying a cheaper house is the easier way to access money tied up in property. In addition to raising money, downsizing has a number of other advantages. For example, a smaller house is cheaper to run - it now costs over £4,000 a year to run the average home, with the bulk going on council tax and utility bills - and there is less work required in maintaining it. Likewise it can help you mitigate any inheritance tax liability. The downsize downside But downsizing is not as easy as you might think. Property may be the biggest source of retirement funding, but it is also the hardest and most expensive to extract. The Woolwich's Cost of Moving Home Survey 2006 has found that moving costs can easily exceed £12,000. Partly because of this, Prudential reckons that, for most people, the benefits of downsizing do not outweigh the costs. It says that only those with detached houses or living in London and the South East can gain more than £50,000 by trading down. Dean Mirfin, business development director of Key Retirement Solutions, uses the example of a couple in a £350,000 property seeking to release £50,000 to pay for holidays and other extras over the next five years. Using a lifetime mortgage, they would need to release £52,000, allowing for costs. If they trade down, however, they would need to move into a £280,000 property - or cheaper - to realise the £50,000. This takes into account stamp duty of 3%, removal and legal costs and £10,000 for any work the property requires.
The costs of moving But if trading down really is the answer to your prayers, the good news is that you should not have to pay capital gains tax (CGT) on any money you make from the sale if it was your primary home. However the usual costs associated with moving still apply. These include: Surveyor's fees, usually about £750 for properties over £100,000. Stamp duty: 1% between £125,000 and £250,000, 3% up to £500,000 and 4% over that. Solicitor's conveyancing fees - around £1,000 for sale and purchase. Estate agency fees of 1% to 3% plus VAT, payable when you sell a property. Removal and storage costs - anything from about £300 to several thousand pounds. Equity release If you don't want to move, or downsizing is not a viable option, an equity release scheme could be considered. To be eligible for equity release, you usually have to be aged between 60 and 95, and have a house worth at least £60,000 with little or no outstanding mortgage. An equity release scheme works by allowing you to borrow money against the value of your home, with the debt repaid from the sale proceeds after your death. Lifetime mortgages involve taking out a loan and allowing interest to roll up, while reversion schemes involve selling a portion of your home in return for equity. However, if you want to release the equity from your house over a long period, instead of having a lump sum, another type of equity release plan, called a drawdown mortgage, may be the way forward. This allows you to take the equity from your home in stages - when you need it - thereby reducing the roll-up of interest. Whatever the product, equity release schemes can be risky, however. Matt Pitcher, an independent financial adviser at Towry Law, believes the biggest concern over equity release is the cost. "The interest rates are high, especially when they are compounded. We only recommend it as a last resort." Consumer group Which? estimates that borrowing £80,000 through a standard lump sum equity release scheme on a house worth £350,000 could cost £256,570 after 20 years, or £343,350 after 25 years, because the interest rolls up. Reassuringly, at least, lifetime mortgages do have a 'no negative equity' guarantee, meaning that the debt cannot exceed the property value. Taking the equity release route also affects your family. "If you go down the equity release route, your family may not have a house to inherit," explains Pitcher. "Wherever possible, you should look to your children for ways of helping out. For example, they can take on the payment of their premiums for life assurance where it is used for IHT planning." So if you find yourself sitting in a house that is also your main source of retirement income, there are several options. Moving home is the first, but it is not always clear-cut. You should also look at other existing assets and other methods of borrowing, including loans and family assistance. If these possibilities are all unrealistic, then some form of equity release scheme may be a solution. If you are thinking of downsizing: Do your sums properly. Can you release enough cash by moving somewhere smaller? Think about the intangibles - are you prepared for the emotional burden of moving, will have you space? Location - if you are moving to a different area you have to think about new neighbours, doctor, transport connections and proximity to friends and family Think long term - for example if you are downsizing as a couple, will one of you be left isolated when the other dies?
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