Downsizing one’s home in later life can deliver a big boost to retirement funding as a result of long-term growth in UK property prices, research has shown, but the rewards are spread unequally across the country.
Savills, the estate agent, calculated that someone with no mortgage moving from a four-bed house — with an average price of just over £560,000 in England and Wales — to an average two-bed home would unlock £305,000 in gains.
A person aged 65 has a life expectancy of about 20 years, according to the Office for National Statistics. That means the freed-up proceeds could be used to provide an income of around £1,200 a month for the rest of their life. As gains from the sale of someone’s principal or sole residence are tax free, the cash generated by downsizing will also be free from tax.
The calculations excluded any savings interest or gains from investing the proceeds; nor are transaction taxes such as stamp duty in England and Northern Ireland, or legal fees, included.
“People are increasingly looking at their main home as a way of supplementing their pension provision,” said Lucian Cook, residential research director at Savills, referring to people approaching retirement. “This generation was right at the front of the growth [trend] in house prices and increasingly we’re seeing more of them with no outstanding mortgage debt.”
Housing is likely to be a flashpoint in the UK general election that is very likely to be called this year, as the main parties look for ways to expand the supply of new homes and free up existing “under-occupied” properties.
Policymakers have pointed to downsizing as one element of the solution, so that large homes owned by older people can be made available to families. But many owners often balk at the emotional wrench of moving out of the family home, when their next purchase is subject to a transaction tax and fees, and suitable retirement housing may not be available in their preferred location.
The Savills research nonetheless suggests there are attractive gains to be made from a big move. The older the downsizer, the higher the estimated monthly income over their remaining lifespan. Female life expectancy aged 75-80 is 13 years, which would unlock funds of £1,955 per month.
However, it also laid bare a north-south gap when it comes to downsizing. The rewards of moving from a four-bed house to a two-bed home were much greater in London and the south of England, where house prices have seen the biggest long-term gains.
Using regional average prices, Savills found someone downsizing in this way in London would unlock £2,523 per month; or £1,485 for those in the south-east. In the north-east and East Midlands, this level of downsizing would deliver average monthly proceeds of £826 and £881 respectively.
The gains were also far less attractive for those relinquishing a three-bed home for a two-bed. The average gain across England and Wales is £102,000, which could provide a 65-year-old with £400 a month for the next 20 years. In the north-east and north-west, the midlands, Yorkshire and the Humber, and Wales, the calculation delivers less than £300 a month in income.
Richard Donnell, research director at property website Zoopla, said: “The numbers don’t really add up unless you live in a big house. There’s not enough money in downsizing to make it worth it, unless you’re coming from a larger four-bed. But you have to go to a two-bed to extract money.”
Owner-occupiers across the midlands and the north were likely to leave a downsizing move till later in life to make their gains last. “People in London and the south would do so at a slightly earlier stage in life, because there’s more equity to be unlocked,” said Cook. “So they can supplement their pension provision for a longer period.”
A study published last month by academics from the London School of Economics and Sheffield university found older owner occupiers lived in relatively large homes of just under 110 sq m on average. But over half of them lived alone. “Moreover, these homes are often inadequate, with 15 per cent formally non-decent and over 60 per cent with energy efficiency ratings of D or below.”
So why don’t more older people downsize? One barrier, the study said, was the time and energy required to find a suitable new home. “As people get older the process becomes more difficult, and those over 80 hardly contemplate it.”
Stamp duty is a key disincentive. Downsizers cannot avoid the tax, but those who stay put pay nothing. The authors therefore recommended older movers be exempted from the duty, or it should be deferred until their death.
Such a move would have to be combined with other progressive tax changes, they said, such as ensuring properties are regularly revalued for council tax. The 25 per cent single-person discount on council tax should also be reviewed.
“This [discount] certainly gives the wrong signals to under-occupiers and also reduces the incentive to take a lodger. It is one more reason why people do not downsize,” the study said.
There were 1.29mn owner occupiers over the age of 65 living in homes of four bedrooms or more in 2021, according to Savills’ analysis of the census. That is 23 per cent of all 65-plus homeowners. Some 48 per cent (2.68mn) own a three-bedroom home.
The rising costs of retirement were underlined last week in revised estimates for the minimum annual income required for a “comfortable” or “moderate” retirement by the Pensions and Lifetime Savings Association. It found the price of a moderate retirement for a single person was £31,300 in 2023-24, a 25 per cent rise on the previous year.
