Sam Dunn: 'My retired parents want to downsize – but will they manage?'

House Doctor
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The Independent Online

Question: My recently retired parents (now in their seventies) are very keen to downsize and release some equity in their property as they don't have too much in the way of pension money. But they'll have to move some distance away from the small Somerset town in which they've lived for more than 30 years. They say they'll benefit from releasing £80,000 – a very decent sum – but I'm worried they'll be hit hard by relocating. Are they biting off more than they can chew?

C L, Kent

Answer: Your parents are members of a fast-growing class of cash-poor, property-rich pensioners who simply don't have enough cash to support their lifestyle.

Downsizing has become an increasingly popular method of raising money, according to Which?, the consumer body. It's clear to see why: sell a mortgage-free four-bed home for £375,000, say, and buy a two-bed cottage for £245,000 in cash: after stamp duty, estate agent and legal fees and moving costs, that's a £125,000 lump sum in your bank.

"This money can then be put into a high-interest savings account and drawn on, used to buy an annuity, or even invested into an income-paying bond," a Which? spokesman says.

For many pensioners who don't have comfortable private pensions and are forced to rely on modest savings and the basic state pension to get by, releasing cash tied up in homes is a financial no-brainer.

But your parents' plan does carry risks. In the first instance, warns recent research from fund manager Blackrock, savers hoping to retire on lump-sum windfalls from property downsizing may discover "these turn out to be 'mirages'.

"Using a property as a means to fund retirement leaves you relying on the health of the property market," warns Steve Rumbles of BlackRock.

Its report highlights how, despite signs of a stabilising market, house prices nationwide are 16 per cent down on last year; sellers fortunate enough to find buyers are selling at an average of 11 per cent below the asking price, a figure as high as 26 per cent in some regions.

There's also a question mark over how much cash it can raise. Say a couple downsize from an average detached house (£236,000,) to a maisonette (£142,000), leaving £94,000 before solicitor's fees and stamp duty, if this had to fund a 20-year retirement, it would generate only £6,000 a year.

Given that your parents' planned downsize would release less than this, they need to be aware of these typical pension sums on offer and be sure of how much extra they stand to gain.

But, perhaps most importantly, there's often a hidden downside to downsizing that only emerges when it's too late: the psychological impact of uprooting and starting again in a new community. Your parents will have to take this into consideration.

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