Is it time to ‘rightsize’ your home? Simon Bruce explores why asset-rich doctors may choose to make a move
Taking the decision to downsize your property is never easy.
But many recent empty-nesters no longer want the responsibility of living in a large property with high running costs and expensive gardens to maintain.
Your choice may be based on logical and prudent thought, but an emotional attachment to the family home can be difficult to assess until the time comes to leave it behind.
According to research, around 55,000 households downsize each year, releasing equity of around £7bn.
Almost half of home-owners who plan to sell in the next three years are looking to move to a smaller property. There is even a new marketing term – ‘rightsizing’ is now used to reflect that people may have different housing needs at various life stages.
At the same time, many have enjoyed substantial hikes in the value of the family home, becoming asset-rich yet relatively cash and income poor in comparison to working years.
The majority of your wealth is usually tied up in illiquid bricks and mortar – your main residence may be a good wealth accumulator, but is less practical as a source of income when your combined NHS salary and private practice stops.
In selling up, many consider a more convenient property, with smaller annual household bills, and use the profits to supplement pensions and other investment income.
Whether this means keeping a cultural bolt hole in the capital plus a rural retreat, or a ‘lock stock barrel’ move to the coast, the options are only really as limited as one’s imagination.
Your energy and drive may be more bountiful in early retirement with plans for frequent business class trips to far-away places, but the cash needed to enjoy a higher quality of life could be locked in a high-value property.
Delaying the decision for ten or 15 years can mean you have less control over the eventual move and less time to reap its benefits.
Understanding your annual running costs
NHS Pensions, when being paid out, increase annually by the Consumer Price Index (CPI), which is a composite index of basic goods and services compiled by the government.
The annual pension increase is linked to the September CPI figure, but is not subject to the ‘triple lock’ protection awarded to the state pension.
In 2015, NHS Pensions will increase by just 1.2%. When compared with the rapidly increasing costs of the goods and services typically consumed by a Cavendish client, the CPI really bears no resemblance.
In a low-interest-rate environment, this means that the level of personal funds required to support the good life is often under-estimated.
When income is not a concern, there is less pressure to really understand what we spend, whether this is on the house, the kids or on holidays. Aside from the very wealthy, the reverse is often true in retirement where savings cannot be easily replaced once spent.
Time to reflect?
However, while ‘rightsizers’ might celebrate the liberation of their less encumbered lifestyle, leaving behind familiarity and 30 years of memories can be an emotional wrench.
Independent think-tank the Intergenerational Foundation conducted a study into the motivational factors behind downsizing for those aged 65-75.
It showed one of the biggest concerns for would-be movers is their attachment to material possessions – particularly when connected to bringing up their children – and specifically, how these might be accommodated in a smaller property.
Those who had taken the leap had endured tough lessons about their personal effects during the moving process; they may treasure them, others may not.
Those questioned were also apprehensive of sharing a smaller living space with their partner – particularly if both were due to retire with much more time to spend at home – and worried if there would be room for the grandchildren to visit.
In reality, downsizers saw no change in their ability to enjoy family occasions.
Helping the children
For many senior medical professionals, a potential factor in downsizing is a desire to make an altruistic gesture – unlocking funds to help with an offspring’s property purchases, whether this is a first flat or moving up the ladder to accommodate a growing family.
Older ‘boomer’ generations now hold the concentration of housing wealth as few twenty- somethings have the financial resources or income to raise a big enough mortgage on their own.
Former generations may have climbed on the property ladder with loans of just three times their salary, but today the ‘bank of mum and dad’ is often left to fund the considerable deposits needed, particularly in London.
First-time buyers – dubbed ‘generation rent’ – now receive £18bn of parental help with their deposits, up from £8bn five years ago.
Reducing your exposure to inheritance tax (IHT) could also be a driving factor in choosing to downsize at the right time.
The tax is levied at a fixed rate of 40% on estates worth more than £325,000 per person or £650,000 per couple. Any gift you make to your children will be exempt from inheritance tax if you live for a further seven years.
In this situation, you must ensure your future security is still your number one priority. Do not be too quick to give away the roof over your head. Will you have enough funds to buy a suitable property and still make the most of a modern, ‘fruits-of-your-labour’ retirement?
Earlier last year, London’s mayor Boris Johnson called for older people who downsize from their family home to be exempt from paying any IHT on their profits in a bid to help solve a housing shortage in the capital.
Other political parties are still considering a mansion tax on high-value properties, which, if eventually introduced after next year’s general election, would encourage movement in this prime housing market.
The opportunity to downsize must be assessed as part of your overall retirement plan. How much equity will be released and what level of income could this create given current interest rates? How will the agents’ fees and stamp duty detract from your lump sum?
Your life continues to evolve – preparing early for a change and leaving enough time to adapt will surely help you to flourish in new circumstances.
Furthermore, for the adventurous, there is always the opportunity of downsizing to a boat – as we congratulate Sir Robin Knox-Johnson (aged 75) completing one of the fastest and toughest single-handed yacht races: the transatlantic Route du Rhum from St Malo in France to Guadeloupe in the Caribbean.
Simon Bruce (right) is managing director of Cavendish Medical, specialist financial planners helping senior consultants in private practice and the NHS
The content of this article is for information only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.