Financial advisers should discuss later life lending with older homeowners considering using tax-free pension lump sums to repay mortgages, Key Equity Release has said.
The equity release adviser argued that homeowners aged over 55 would benefit from advice examining their pensions, property wealth, investments and debts before making withdrawals.
Later life lending, including lifetime mortgages, could offer some borrowers a more flexible way to manage existing mortgage debt while preserving pension savings, according to Key.
HM Revenue & Customs data shows that a record 1.27 million people made flexible pension withdrawals during the 2025/26 tax year. Many are likely to have taken advantage of the option to withdraw up to 25% of their pension savings tax-free.
About 770,000 people accessed their pensions during the first three months of 2026.
Data obtained from the Financial Conduct Authority through a Freedom of Information request showed that around £18.01 billion was withdrawn through tax-free lump sums in 2024/25, compared with £11.25 billion in the previous tax year.
Some industry experts believe the increase is partly linked to plans to include unused defined contribution pension funds in estates for inheritance tax purposes from April 2027.
Key cautioned that withdrawing the maximum tax-free amount could reduce the future income available to people who have stopped working and are no longer contributing to their pensions.
The company called on independent financial advisers and wealth managers either to offer later life lending advice themselves or to establish referral arrangements with specialists.
Lifetime mortgages can allow borrowers to pay all, some or none of the interest as it accrues. Some products also permit regular capital repayments and include protections such as security of tenure and a no negative equity guarantee.
Will Hale, chief executive of Key Equity Release, said: “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.
“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.
“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.”
