Once the children have flown the nest, many retirees face a dilemma: should they stay put, sell and buy a smaller property or rent?
Buying a new home or renting can be a daunting process, both of which have advantages and disadvantages.
Purchasing a smaller property
Buying a property in the form of a smaller home can deliver financial benefits such as being mortgage and debt-free and releasing cash to supplement retirement income.
Downsizing in this way can reduce the time you spend on the upkeep of the property, furthermore your utility bills should decrease.
However, there are also disadvantages. Estate agents’ commission is usually 1% of the agreed sale price, although depending on the estate agent you elect, the commission fee could be higher or lower.
Legal fees on your sale and purchase will also need to be factored. Stamp duty will be payable on your new home – subsequently this would reduce any surplus funds due to you.
Saga, the over 50’s specialist, The London School of Economics, and Centre of Economic Business Research have all called for the Government to abolish Stamp Duty on a one-off basis for retirees choosing to downsize.
However, it remains to be seen as to whether the Government will implement a Stamp Duty policy which would benefit retirees downsizing.
Buying a flat
It’s worthwhile noting that if you purchase a flat, whether in a residential block or retirement village, this will be a leasehold property.
You will not own the freehold and you will be subject to paying ground rent and service charge.
Ground rent for properties outside of London should be up to £300 per annum and the premium payable for properties within London can be up to £1,000 per annum.
Your solicitor should advise you about ground rent provisions as some leases refer to doubling ground rents, which could be a financial burden in the future.
Whilst the Government have carried out a consultation on ground rents, no implementation has been made as of yet.
With regards to service charge, the landlord will usually appoint a management company to administer the maintenance of the common areas, therefore service charge is payable which can cost thousands of pounds per annum.
This is all dependent on the amenities provided. Please note there’s no guarantee as to the level of future service charge, causing uncertainty around future payments and potential financial strain.
Taking out a mortgage
Lastly many retirees wish to be closer to their children and buying a smaller property doesn’t always mean a lower price tag, especially if it’s in a desirable area, this may result in a small mortgage. If this is the case then you would need to consider if the mortgage repayments are sustainable.
Renting
After selling your property, you may intend to rent. This is becoming common for retirees because the flexibility makes it an attractive option.
As a tenant you don’t need to worry about the maintenance of the property, as this responsibility will fall upon the landlord.
Some view renting as ‘throwing money down the drain’. Additionally, a lack of security is a concern because landlords can serve notice to evict subject to serving the appropriate notices.
Some landlords have a reputation for being difficult and therefore may not carry out maintenance works to the property.
Inheritance tax
However, renting can have a financial benefit in respect of inheritance tax. If you have surplus cash available once you have accounted for your rent and other expenses, it would be worthwhile obtaining advice from a financial adviser as you could make regular gifts to take advantage of the inheritance tax exemptions.
The current tax-free inheritance tax allowance is £325,000 (£650,000 for couples) commonly known as the nil-rate band.
If you need to go into a care home and own a property this can cause serious issues. Therefore, it’s imperative to know the rules relating to long-term care funding.
The local authority will carry out a financial means test to ascertain whether you qualify for financial assistance towards your care.
They will also investigate if you ever owned a property and what you did with any sales proceeds.
If you had recently sold your home, moved into rental accommodation and given your children early inheritance, then this may prove to be problematic as the local authority may not contribute towards the cost of your care.
The alternative: staying put
Some retirees decide to remain in their current home as they don’t want to leave a home full of happy memories.
As a result, rising numbers are releasing equity from their home to fund their retirement. This is an alternative to downsizing or renting, however the major drawback in this respect is the compound interest you are charged over the years, which reduces the equity available for you to pass on to your children or pay towards your care.
Your home is a key asset and whilst there are pros and cons to the above-mentioned options, it would be prudent, to speak to a financial adviser, before reaching a final decision.
Whatever option you elect, you need to ensure it fits your lifestyle needs and wants.
Priya Lakhani is a solicitor in the real estate team at SA Law
