Later life lending advice should form part of the conversation around the pension tax-free lump sum, says Key Equity Release.
According to Key, homeowners over the age of 55 using tax-free lump sums to pay off mortgages would especially benefit from holistic advice taking into account all aspects of finances.
Data from HM Revenue & Customs shows a record 1.27 million people made flexible withdrawals from pension funds in the 2025/26 tax year, many of whom will have taken advantage of the 25% tax-free lump sum. Separate FCA data found that in 2024/25, around £18.01 billion was withdrawn through tax-free lump sums compared to £11.25 billion in the previous tax year.
Key says that for some homeowners, later life lending solutions may provide an alternative way to clear their mortgage while preserving pension wealth for future retirement planning.
Later life lending products allow customers to pay interest in full, in part or not at all and enable customers to make regular capital repayments as well. Lifetime mortgages also come with embedded protections including certainty of tenure and a no negative equity guarantee.
Will Hale, CEO 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.”
Hale said that 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,” he added.
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