On the face of it, the over 55s are sitting pretty on a property cash pile of around £1.9 trillion of equity in their homes.

Property pensions were the big financial plan for many until house prices crashed in 2007 – and although they are sliding gently rather than in free fall, values are still dropping.

The idea was to buy a house, let the value keep on rising, then when retirement came along, sell up and downsize. The increased house price would pay off the mortgage and leave a chunk of cash to buy another home outright and, hopefully, put some money in the bank.

The plan clearly did not work for many.

House prices peaked in November 2007, with the Land registry average home price in England and Wales hitting around £184,000. That same home plunged in value by 16% to £154,000 in the spring of 2009 and has crept back to a current value of £163,000.

In effect, house prices are back at the spring 2006 level.
Because no one lives in an average home, the house price crash has affected property pension ambitions in different ways.

For those who bought a home as prices were bubbling towards the peak, the downsizing dream has soured. Investing in property has made them no profit – and possibly a loss if they can sell in this sluggish market.

Downsizing is not an option open to all, the choice depends on your post code, according to the latest research from the Safe Home Income Plans (SHIP), the UK’s trade body for equity release product providers.

Remember, the plan was to buy and downsize in the same area to stay near family and friends.

The plan sounds good, but the reality is even though the over 55s have more expensive properties than other age groups, the housing market has distorted to lock many of them in homes that they cannot sell.

SHIP has looked at 25 local council areas with a high number of residents aged over 55. The review revealed that in a third (32%) of neighbourhoods, downsizing would either leave homeowners worse off or would not release enough money to make the move worth while when all the costs were considered.

The issues involved need balancing – and cost is not always the decider.

For instance, do a couple with ill-health downsize to move near family and friends for support even though downsizing will cost them cash, or do they stay put and ease their retirement with a little more cash?

Most couples would make a choice based on their own checklist of priorities and money would not always be the most important.

So, where are the places where downsizing makes a profit? Table 1 lists 17 of the 25 local councils reviewed by SHIP where downsizing returns a profit.

TABLE 1: Council areas where downsizing makes a profit

Source: SHIP

Homeowners in Torquay came out with the best deal – around four out of 10 Torquay residents are over 55 and the average price of their homes is £241,263. If they sold up and bought an average priced home outright in the same council area, they would still have 360,939 in the bank after paying just over £8,000 to move.

The table lists the cost of an average house in the council area. Moving costs include stamp duty, legal fees and estate agent charges.

Incidentally, the rest of Devon does not fare so well with cash in the hand after downsizing nudging in to the black at £6,361. Living in Plymouth or Barnstaple rather than the sunny English Riviera of Torquay comes at a cost.

The price paid by over 55s living in the remaining eight council areas is even more if they choose to downsize (Table 2).

Affluent Poole downsizers will make a loss of just under £40,000, while those in Hereford are almost £43,000 in the red.

The other option is equity release. For many over 55s caught in the downsize trap, this is another viable option that solves the problem of boosting retirement savings for the long-term by utilising equity in a property.

Equity release is not for everyone, and families expecting to hand down property need to sit down and discuss the pros and cons in detail before anyone considers signing up for a lifetime mortgage.

But, for cash-rich over 55s with a home without a mortgage who need more cash to meet their day-to-day bills, then equity release is a possible solution.

TABLE 2: Council areas where downsizing makes a loss

Source: SHIP

Andrea Rozario, director general of SHIP said: “For many people, the home is their largest asset and releasing some of the equity will help them finance their retirement. The best way in which to do this depends on each individual’s financial situation and preferences.

“However, equity release and downsizing should both be considered – they are not mutually exclusive and can work very well in conjunction.”

For example, if inheritance is an issue, then selling a home to raise cash from the equity is fine – and there’s nothing wrong with then clawing back some cash from a lifetime mortgage after downsizing.
The cash go as a gift to loved ones – and providing the estate is below the £325,000 limit or, if not, the benefactor lives for seven years or more, no inheritance tax is involved.

House price mania does not help downsizers, but the changing market is adding equity release to the mix of financial solutions for retirement savers.