Don’t default to pension withdrawals in later life lending, advisers warned

Later life lending advice should explore all the options available to homeowners instead of defaulting to tax-free pension lump sums, Key Equity Release has warned.

HMRC data analysed by Key shows a record 1.27 million people made flexible withdrawals from pension funds in the 2025/26 tax year, many of whom the equity release adviser says will have taken advantage of tax-free withdrawals of up to 25%. In the first three months of this year alone, 770,000 people accessed their pension.

But Key warns that using pension cash to pay off mortgages is not always the most appropriate option and says advisers should explore later life lending products, such as modern lifetime mortgages, as part of a long-term retirement funding plan.

Will Hale, CEO of Key Equity Release, explained: “The number of people taking the full 25% tax-free lump sum from pension funds is surging and the value of money released has increased by more than 60% year-on-year in the most recent figures.

“Taking the lump sum will make sense for many of those people and it is definitely the case that the inclusion of unused direct contribution pension funds in estates from next April is having a major influence on these decisions.

“However, people who are using tax-free lump sums without taking appropriate advice are potentially not achieving good outcomes.  Those paying off mortgages and not considering later life lending options as part of an alternative financial planning strategy risk not making best use of a major asset in their home while reducing the value of another asset in the form of their pension savings.”

FCA data from a freedom of information request found around £18.01 billion was withdrawn through tax-free lump sums in the 2024/25 tax year,  compared to £11.25 billion in the previous tax year.

The upcoming inclusion of unused defined contribution pension funds in estates from April 2027, which will potentially increase inheritance tax bills, is believed to be behind the increase.

And while accessing pension savings will be the right choice for many consumers, Key warns that taking maximum tax-free withdrawals will reduce future pension income for people who stop work and are no longer contributing to their pension fund.

“For many over-55s homeowners, property wealth will be their biggest asset and how it is accessed should be a key part of financial conversations alongside pensions and investments”, Hale said.

“Truly holistic advice should include later life lending options and products such as lifetime mortgages must be part of the mix in discussions around, taking tax-free pension lump sums.”