Downsize or Equity Release: Which is Better?


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Recent research reveals that nearly one in eight people retiring in 2018 have no private or company pension. As the state pension is just £164.35 per week, many pensioners who own their own home are looking to release money from their property in order to balance the shortfall in income.

Which is better depends on personal circumstances. This article takes a looks at how finances are affected at retirement, as well as the pros and cons of downsizing and equity release to boost retirement income.

The financial shock of retirement

Many people face a sharp drop in living standards when they retire due to the fall in income. According to social policy research and development charity, the Joseph Rowntree Foundation (JRF), pensioners who rent their homes are much more likely to be in poverty than owner-occupiers. JRF also report that single pensioners and those with non-white ethnicity are more likely to suffer pensioner poverty.

Statistics produced by the Office for National Statistics (ONS) on the income of retired households in the UK over the past 40 years shows that the gap between the average amounts of household income for those with and without a private pension has been increasing since 1977.

Whatever the personal circumstances, it is more than likely for most that financial situations will change when people retire. Experts claim British people need at least £260,000 to retire without money worries. The research paper by insurer Royal London warns that for most Britons’ old age savings are woefully inadequate.

For advice on how to manage your money in retirement you may want to seek the advice of an Independent Financial Adviser. The Money advice Service recommends the following tips on managing financial changes in retirement:

  • Draw up a budget for retirement
  • Identify possible cuts in spending
  • Look for ways to increase income

Retirement options for property owners

If you retire without a pension, or without a sufficient pension to live comfortably, but own your own home, unlocking cash from your property could be the most sensible option to see you through retirement.

There are two main ways to free up money from your property. One option is to downsize and move to a smaller, less expensive property, or to a cheaper area; another is to release money from your property through equity release.

Let’s take a look at the pros and cons of downsizing and equity release

Downsizing to increase standard of living in retirement

Perhaps the biggest benefit of downsizing is that you retain ownership of your property and can still pass it on to family when you die. Also, money is released without incurring debt. However, you will need to have a sufficiently large enough home to enable you to downsize. There is also the option to move to a cheaper area.

The disadvantage of selling your home to release capital comes down to the cost. When selling property, you may not achieve the market price you hoped for. Then there is the actual cost of downsizing, which includes Estate Agent fees, valuation fees, stamp duty, legal fees and removal costs. This could substantially eat into the capital released. According to Saga this could amount to more than £25,000.

In addition, emotional attachment to both the property and its contents may be problematic. If you are moving to a smaller home, you won’t be able to take everything with you. This process can be emotionally overwhelming. If you have made up your mind to downsize, the MyMove senior-friendly guide to downsizing has some great tips to make the process easier. Don’t underestimate the fact that moving away from friends and established neighbours can be quite a wrench.

If you still have a mortgage, the option of downsizing may not be possible, particularly if you don’t have any additional sources of income. Even with some income, a relatively small mortgage is difficult to get in later life.

Equity release: the pros and cons

Equity release is a way of releasing money from your home and turning it into a cash lump sum while you are still living there. It’s a financial product only available to the over 55s (over 65s for home reversion plans) and is designed to help people get money from their property without moving. One of the big attractions of equity release is that you don’t have to have finished paying off your mortgage to do this.

There are two forms of equity release:

  • Lifetime mortgages (different to standard mortgages)
  • Home reversion plans

Lifetime mortgages are the most popular form of equity release. Find out the reasons why you may consider equity release with a lifetime mortgage here. Lifetime mortgages are different to standard mortgages as you don’t have to make monthly repayments (though there are some equity release products where you can). Instead, with a lifetime mortgage the interest builds up and is paid back to the lender when you die or move into care and the property is sold.

Home reversion plans are when you sell a part of your property to a scheme provider and they pay you a tax-free lump sum in return. You have the right to live in your home rent-free for life, but as the lump sum is calculated at much less than the value of your home, and the payback is based on a percentage ownership, the equity release company usually benefits substantially when the property is sold and they recoup their share.

When considering downsizing or equity release it is a good idea to seek the advice of an Independent Financial Adviser who will assess the best options for you and your financial circumstances.


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