The equity release adviser said homeowners aged over 55 considering using tax-free pension withdrawals to repay mortgages would benefit from holistic advice that considers all aspects of their finances.
The firm said later life lending products, including lifetime mortgages, could be used as part of a long-term retirement funding strategy to help manage debt and access housing wealth more flexibly.
HMRC data cited by Key showed that a record 1.27 million people made flexible withdrawals from pension funds during the 2025/26 tax year, with many expected to have taken advantage of the ability to withdraw up to 25% of their pension tax-free. In the first three months of this year alone, 770,000 people accessed their pension savings.
Key also pointed to Financial Conduct Authority (FCA) data obtained through a Freedom of Information request, which found that around £18.01bn was withdrawn through tax-free lump sums in the 2024/25 tax year, up from £11.25bn in the previous tax year.
It added that some of the increase in withdrawals was being driven by planned changes that will bring unused defined contribution pension funds into estates for inheritance tax purposes from April 2027.
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However, Key warned that taking the maximum tax-free withdrawal could reduce future retirement income for individuals who stop working and are no longer contributing to their pension.
It said later life lending could provide an alternative route for some homeowners looking to repay their mortgage while preserving pension assets.
Similar calls were made by the Society of Pension Professionals (SPP), which urged that joining up housing and pension policy could offset the risk of financial shortfall in later life.
Will Hale (pictured), 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.”
