The financial implications

An important part of your planning will be to consider carefully the impact on your finances both now and into the future.

Income and spending

Since downshifting usually involves working less or swapping high earnings for a more satisfying job, your income will normally be lower once you have downshifted. Investigate carefully by how much you expect your income to fall. In take home terms, the cut might not be as great as you feared because earning less may mean you pay proportionately less in tax and depending on the type of downshift you might save on other work-related costs, such as travelling, costly lunches and work clothes.

There might be other indirect savings too if, say, you have more time to do your own childcare, housework or gardening instead of paying someone else to come in and help. If your budget will be tight, consider how you might cut back on your spending - for example, switching to cheaper brands, entertaining at home instead of eating out, and so on. Consider trading skills with friends and neighbours either informally or through a local exchange trading scheme (LETS), for example, 'paying' for a plumbing job by cooking a meal or providing book-keeping skills.

If you can, pay off credit card debts and other loans before you downshift so that you save on the repayments. At least shop around and switch to ensure you are getting the cheapest deals.
State benefits and help for students

If your income will be low, check whether you would be eligible to claim state benefits, such as working tax credit and council tax benefit.

If you are switching career and this involves retraining, check whether you are eligible for any bursaries or loans. Student loans are available to mature university students provided you are under 50, though you are unlikely to be eligible if you have had state funding in the past for a university course. Between 50 and 54, you might still get a student loan but you will have to show that you plan to return to work.

Your home and mortgage

Your home could be a source of income to finance a downshift either by borrowing against it or selling to release capital.

Borrowing by taking out or extending a mortgage on your home might be appropriate if, for example, you need to finance a limited period of retraining for a new career. However, you need to be sure that you can meet the repayments.

If you are happy to move, you might be able to sell your present home and buy somewhere cheaper in order to release a lump sum to help you, say, finance retraining or set up your own business. Alternatively, you might use the money raised to pay off an existing mortgage, which would permanently reduce your monthly spending and so help you to live on a lower income.

Selling to release capital does not necessarily involve downsizing - in other words, buying somewhere smaller. If you currently live in one of the more expensive areas of the country, you might be able to buy somewhere cheaper but of similar size or even larger by relocating some distance away.

If you have space, you could make money from your home by taking in a lodger. Under the 'rent-a-room scheme', up to £4,250 a year of income from this source can be tax-free.

Pensions and savings

Whether your downshift is temporary - for example, while you travel or while your family is young - or permanent, it is likely to affect not just your income now but also the income you will have throughout your retirement.

Most people build up an entitlement to a state pension while they are working by paying National Insurance contributions. If you stop work, this might create a gap in your National Insurance record and result in a lower pension at retirement. You can check the position by getting a state pension forecast and if necessary paying voluntary National Insurance contributions (£7.35 a week in 2005-06).

Occupational pensions through your job and pension savings you arrange for yourself are usually linked to your earnings either directly (as in a salary-related scheme) or indirectly because the contributions paid in are often a set percentage of your pay. If downshifting means you will earn less, your eventual pension is likely also to be less.

If you are planning to finance your downshift by taking early retirement, be aware that starting to take your pension early normally means a lower yearly income throughout your whole retirement. This reflects the fact that your pension will have to be paid for longer and also that you have had less time to build up your savings. For example, in a salary-related scheme your pension will often be reduced by 6 per cent for each year that you retire early. This means that retiring five years early might reduce £1,000 of pension to £700 a year.

Where you will be relying partly on income from savings and investments, it is important to review them regularly to ensure you are getting the best returns. If they are to provide income over the long-term (ten years or more), make sure you invest partly for capital growth as well as for income, otherwise even modest inflation will eat into the buying power of your income as the years go by. Consider help from an independent financial adviser.

Jonquil Lowe is a former head of the Money Group at Consumer's Association and author of Downshift published by Which?Books (£11.99 from bookshops in 2005/06 or Freephone 0800 252100).