Retirement Income Alliance


by Malcolm Small 21st March 2107

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With average pension fund sizes now stuck for a number of years around the £27,000 mark, the harsh reality is that in many cases for Mr. and Mrs. UK Retiree their home will be their main capital asset. Whether that capital is locked into a main family residence or into second homes, the reality for many is that this capital will need to be converted in some way into cash to enable a reasonable standard of living in later life.

This is particularly the case if there is a wish to enter retirement – whatever “retirement” now means – before they are entitle to receive the basic state pension. Research in this area is thin on the ground, but it looks as though, despite being cited by quite a large proportion of the population as their intended way of funding an enhanced retirement, “downsizing” seems to be happening rather less than we would expect it to. Certainly, the current relatively subdued volume of residential property transactions would suggest that many who perhaps should be taking this route are showing some reluctance to do so. Why might this be the case?

There are many reasons which spring to mind. The first is the sheer cost of moving house these days. Stamp duty (or Stamp Duty Land Tax, SDLT, to give it its full title) can now run into thousands, if not many tens of thousands of pounds. Add in estate agency fees, legal costs and removal expenses and even a move to a house half the amount realised from selling a former family home can rack up expenses which are eye-watering. Personally, I think the gradual “ratcheting” up of SDLT, will be judged by history as putting a serious brake on the free operation of the property market for all but the very wealthiest individuals.

Then there are the “soft” factors, the emotional ones. Moving house is commonly cited as the most stressful event after bereavement. As people age, their ability to cope with stress can reduce quite sharply, and can create medical issues. The idea of uprooting from familiar surroundings, which are also valued by children, disposing of familiar possessions, and relocating to somewhere smaller, can be intimidating to many. The temptation to try to “struggle on” can be strong. This, of course, is a factor behind the strong growth the market for Equity Release products in recent years, as people choose to “sit out” their later years in the home they have always enjoyed, and this is, of course, also a valid route.

But “clinging on” also comes with costs. Unnecessarily large gardens can become a burden to look after. Larger houses come with larger maintenance bills, and higher fixed costs such as Council Tax, compared with smaller properties. Money released by the sale of a principal private residence is free of tax in the hands of the former owners and can be invested without fear of any punitive interest roll-up as is found with Equity Release, for example. It can fund the most active early part of retirement, when people will typically wish to spend money more freely than the more sedentary later stages of life.

Popular survey evidence seems to point to more and more people who are seeing “downsizing” their main residence as one of the main ways they intend to fund retirement. And yet, there seems to be a “disconnect” between this intention and what is actually happening in the markets. We must hope that this does not lead to a generation of pensioners getting too old to do what they would have been wise to do earlier and simply struggling on.