Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
THERE’S a simple logic to ‘downsizing’ - the process of moving from a larger home to a smaller one, typically in later life.
You’ve spent years in the family home and, with the children grown and years of retirement still stretching before you, you no longer need such a big property. Why not move to somewhere smaller where running costs are lower and the upkeep is more manageable, with the added bonus of a big windfall from selling a big house and buying a smaller one?
It works perfectly in theory - which makes it strange that so few people actually do it. Recent research by Legal & General has shown that fewer than one-in-four of over-55s households now plan to downsize. L&G said there are 200,000 fewer potential downsizers now than there were three years ago.
When asked why they won’t move, respondents said lockdown over the past two years had shown them the value of extra space, with many opting to spend money improving the family pile rather than move.
If the pandemic has put a pause on downsizing plans, it only increases a trend that was in place before Covid-19. Many were already finding that, once they ran the numbers, the reality of downsizing seldom lived up to the dream.
Firstly, moving is an expensive business and any potential windfall is chipped away at by the cost of preparing the house for sale, stamp duty, estate agency fees and conveyancing - it all adds up.
Moreover, you simply may not be able to find a suitable property to downsize to. The downsizing dream is based on selling a bigger house and buying a smaller one - and pocketing the difference in price. But that only works if you’re comparing like-with-like. A bog-standard detached house will have to be replaced by a bog-standard semi if you want the sums to add up - but I doubt that’s what hopeful downsizers have in mind.
Their real dream is to trade their existing home for something that, while smaller, is more desirable in other ways. It’s in a beautiful location, it’s hundreds of years old or kitted out with dream kitchen and bathroom.
Inheritance tax (IHT) may also be a factor in their reluctance to move. The system for IHT gives a bigger tax break for wealth held in property than in other assets, so families may reason that staying in their family home forever is the best way to pass on wealth to children.
Property wealth can be an important part of retirement financial planning, particularly in meeting the costs of long-term care. But assuming that value can be released by downsizing may be a mistake. It is still likely to be assets held in pensions - which also enjoy some shelter from IHT - that offer the most flexible retirement income - don’t bet on housing wealth to bail you out.
If you need help planning your retirement income or legacy wealth, professional financial advice may be able to help. If you’re starting to think about your retirement, the Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.
Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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