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article imageOp-Ed: Is downsizing really a viable option for funding retirement? Special

By Katherine Ogilvie     May 22, 2014 in Business
As convenient as it might be for the rest of society if the retirees gave up their family homes, it may not be the best thing for the individuals involved.
Funding retirement can be a substantial cost and an increasing number of individuals feel they have not adequately prepared for it (67 percent of those questioned in a recent HSBC survey felt this way). Therefore, many of those approaching retirement are planning to use the equity in their homes as their retirement fund. This is becoming very common; a recent report by LV found that 52 percent of home owners over 50 are relying on their homes for retirement costs. This is almost double the amount of last year’s figures (28 percent). It’s speculated that this shift in reliance on home-ownership to fund retirement is due to a long period of house values rising and low savings interest rates.
Another way people are attempting to increase their retirement fund to a feasible amount is to retire later; according to ING direct’s data, in 2007 the age most individuals were expecting to retire was 60 and now it has gone up to 65.
The Appeal of Downsizing
There are many perceived benefits of downsizing in retirement — obviously the large release of capital is a huge part of the appeal. The previously mentioned research by HSBC discovered that the reason just over a quarter of pensioners don’t achieve their aspirations of travel was because they did not have the funds they expected. Having a comfortable and exciting retirement can be difficult without enough cash flow; downsizing helps resolve this. A smaller household also means decreased bills and general running costs, so money is saved in that respect too. Another advantage often cited is that a smaller home requires less upkeep allowing more time and energy to be spent on more enjoyable endeavours. Omar Homes, the UK’s largest park homes manufacturer found that a large majority of their customers were pensioners choosing to downsize to park homes which are specially designed for those in retirement.
Furthermore, there seems to be a societal perception that if those in retirement downsized it would help with the housing shortage — for instance a councillor in Hull has suggested that providing smaller but appealing homes for the retirees to move into would free up housing for families waiting for council homes. It has also been suggested that it could help free up housing for first time buyers and help young people get on the property ladder.
Why Retirees Aren’t Always Keen to Downsize
Despite these benefits and the society’s expectation, many pensioners are not interested in downsizing. A poll by Yougov discovered that the benefits pensioners found most attractive about downsizing were the reduced costs of running and the lower maintenance of a smaller house and although pensioners were aware of the benefits only a minority (16 percent) expected to downsize by 2017.
While those preparing for retirement are relying on downsizing; those who are already retired tend to be more reluctant towards the idea of downsizing. Just Retirement conducted face-to-face interviews with 1,000 homeowners over the age of 55. They found that around 50 percent of those with one to five years until retirement would rather downsize than use equity release, however this was true of only 33 percent of those who were actually retired.
This research explored why those further into retirement prefer the idea of equity release instead of downsizing. One of the most cited reasons for pensioners being hesitant to downsize is wanting to stay close to friends and family and not wanting to leave a cherished house. The majority of retired homeowners have lived in their homes for well over a decade; Just Retirement found that 55 percent of those interviewed had lived in their homes for over 25 years and 24 percent purchased their homes more than 16-15 years previously. It makes sense that if you have spent many years personalising a house and living in a community, moving away from that may not necessarily be an appealing prospect.
The financial costs of moving were also cause for reservations — the concern being that price of the processes of selling, buying and moving reduces the amount of money released. Those questioned also mentioned that they thought finding a suitable new home would be a hassle and that the extra space in their current housing was necessary for their possessions and for when family members visit.
How Much Money Does Downsizing Release?
How much money can actually be regained from downsizing can vary greatly depending on which area of the UK the homeowner lives; MGM produced insightful research earlier this year which included a table of how much equity downsizing could release depending on where you live. For example, they found that if you live in the South East of England the capital released if you were to move from a detached house to a bungalow would be roughly £153,218 whereas in East Anglia it would be £68,217. Depending on what type of account this money is placed in, the monthly income will be from £1,034 to £223 for South Eastern properties and from £458 to £99 for East Anglia properties. Living in the South East or London means downsizing is a lot more likely to release significant capital than living in other areas of the UK.
Like most financial options, the extent of how beneficial downsizing is depends on a range of factors, furthermore there are also personal factors to be taken into consideration — to take a one size fits all approach to downsizing is misguided.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com
More about Retirement, Downsizing, Pensions, uk pensioners
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