The Arithmetic Of Downsizing

The Arithmetic Of Downsizing – Does It Add Up?

For those who didn’t manage to save enough to fund their retirement, or find their existing home is too big and expensive to run, there can be an easy answer. You sell your home, move to a cheaper one and live off the money you’ve made. Moving somewhere smaller, the theory goes, can be a good way to slash household expenses such as heating bills and council tax. You could end up with a reasonable amount of cash to spare. But do the sums really add up?

The former pensions minister, Steve Webb, now a director at insurer Royal London, had some strong words to say to those intending to rely on their home to fund their retirement. He has called this the “downsizing delusion”, expressing the view that most people doing this would experience a fall in their living standards on retirement. He went on to say that “in most of Britain, the amount of money you could free up by trading down to a smaller property would only generate a very modest income.”

Lack Of Retirement Housing

With shortages in all sectors of the property market, it could be hard to find the right property to downsize to, in a suitable location close to local amenities, like shops and doctors’ surgeries, which are important considerations for older people. In addition, many people still have children living with them, or are still paying off their mortgage, meaning that downsizing might not work for them.

Mr Webb illustrated his point with this example, based on 2016–17 tax year full new state pension of £155.65, which was increased to £159.55 from April. If someone sold a detached house for, say, £310,000 and traded down to a semi-detached home at £197,000, they would have around £113,000 to use as a pension. He calculated that this sum would buy an annuity paying around £5,700 a year. Add to this the value of a state pension at £155.65 per week and this will give an annual income of around £13,700 a year, half the average wage of a full-time worker.