Nearing Retirement - Is Downsizing the Best Option?

For those nearing or in retirement, downsizing is becoming increasingly common as they choose to move to a smaller property more suited to their needs and/or release some equity with which to enjoy their new-found freedom.

The current property market means many will have benefited from significant rises in the value of their home throughout their lives and so will often find their home is their most valuable financial asset. However, smaller properties don't always necessarily carry smaller price tags, so whether downsizing works for you all depends on how effectively you plan in the years leading up to it.  

As with any buying and selling of property, this will incur the usual legal fees plus Stamp Duty Land Tax and possible estate agent fees depending on which you use. However, your main residence is not normally considered a taxable asset – with the exception of inheritance tax – and so you'll not have to pay tax on any profit made on the sale of it.

Any money that you receive through the sale of your property can be invested to provide for your future and one efficient way of investing this is via a personal pension. The benefit of this is that within certain limits you will receive tax relief on your contributions and so whilst monies are invested in the pension they are able to grow virtually tax free.

When you decide to start withdrawing from your personal pension plan, which can be done from age 55, you have a wide range of choices, from a guaranteed annual income for life through to ad hoc payments whenever you need them. Since the introduction of pensions freedom, you're able to draw as much as you like from your pension fund, although it's not advisable to draw too much as this will become costly in terms of tax and could exhaust your fund value. The first 25 per cent of your pension fund is able to be drawn tax free. Another benefit is that the fund is outside of your estate for the purpose of inheritance tax and upon your death, your nominated beneficiaries can generally receive the balance of the fund tax free.

It may also be beneficial to consider individual savings accounts (ISAs), which allow you to invest up to £20,000 per tax year into an investment which grows tax free and can be drawn upon at any stage, generally without penalty. ISAs can be invested in cash deposits, such as high interest savings accounts, or in a range of long term investments including stocks and shares, which does carry the risk of being lost, but may produce significantly larger investment returns than bank accounts over time.

It sounds obvious but when weighing up your retirement options, you should also check your entitlement to a full state pension. This can be achieved by completing a BR19 form, which can be obtained from the pension service. Under current legislation, you're required to achieve 35 years’ worth of National Insurance credits to achieve a full pension, but if you fall below this you can purchase additional credits to make up the shortfall.

If the primary aim of downsizing is to free up finances or clear existing debts, another alternative is ‘equity release’ which effectively means borrowing against your property. This arrangement means that rather than repaying the interest on a monthly basis, it's rolled up and eventually repaid when you either sell the property or it's sold following your death. Any excess that remains after the loan is repaid will fall into your estate and can be distributed according to your wishes. While agreements like these have been criticised in the past, nowadays most of these types of contracts have a ‘no negative equity’ guarantee meaning that the lender can't force you to leave your property if the interest accrued exceeds its value.

Like Adroit, most independent financial advisers will offer a free, no obligation initial meeting and it's worth taking advantage of this to gain some professional advice about the best way forward for you.  

For further advice, contact Paul Rosson, Senior Financial Consultant