Is ‘cashing out’ leading to worse outcomes for borrowers?
Guest Blog Writer: Charlotte Grimshaw, Head of Intermediaries
17 March 2025In January, research released by Legal & General claimed that 21% of people who withdrew a cash lump sum from their pension did so as soon as they turned 55.
However, the Legal & General research also found that nearly one in five (18%) ended up regretting their decision. Specifically, 24% of those who withdrew lump sums hadn’t realised the effect it had on their eligibility for means-tested benefits.
This would suggest that the consumers did not have access to all the relevant information (whether sought or otherwise) at the time of deciding to take the lump sum payment.
It’s clear there’s an information gap and, while borrowers have different needs and wants, there’s also a suitable alternative that may have helped some of those achieve their goals, without taking the tax-free lump sum.
There are mortgages available for later life customers that look at their assets and income to support affordability – meaning that lenders can take into account more than just income being drawn currently – and look more at their overall income potential. This gives borrowers access to standard products, from standard mortgage lenders, with the often-lower rates available to younger ‘standard’ borrowers.
I can understand the rationale to take the lump sum. After all, haven’t we always been told that a bird in the hand is worth two in the nest? Surely, it’s better to take this enticing ‘tax-free’ sum as soon as possible? There are, however, potential downsides to taking this lump sum.
Why ‘cashing out’ may mean losing out
If the lump sums being taken out of pension pots at age 55 are being used as gifts for children, for home improvements, or for purchasing a holiday home/buy to let/holiday let, this may be better funded with a mortgage than with a pension withdrawal.
And this can be a standard mortgage, rather than an equity release product or RIO.
By leaving their pension intact, consumers could benefit from valuable investment growth. Once that 25% is spent, it’s gone! By taking out too much, too soon, they could risk losing out on much-needed income later in life.
The mortgage market has seen some real positive change over the last decade, not least the growth of later life lending in the mainstream (with the building society sector leading the way here)!
As well affecting eligibility for means-tested benefits, withdrawing lump sums from their pension might have an impact on future pension contributions. Specifically, on the tax relief on future pension contributions, which could reduce from £60,000 a year to £10,000. Specialist advice will be invaluable for your clients on this as it’s a complex topic.
Borrowers need to know all the implications of their decisions. They need to understand all scenarios to make an informed choice that will lead to better outcomes. So, what’s the alternative to releasing money that doesn’t involve taking your tax-free lump sum?
Putting a pension pot to work
With so many changes in the mortgage market, many borrowers are unaware that they can use uncrystallised pension pots towards mortgage affordability. It’s no longer the obvious choice to pay off your mortgage at retirement age. For some people, continuing a mortgage into retirement might be a suitable alternative.
We can use pension assets towards affordability. So, rather than taking out these lump sums (from which there’s no going back), borrowers can keep their pension pots intact and put them to work.
Borrowers don’t need to be drawing lump sums or taking a monthly income from their pension for it to be included for affordability. We just need to evidence they can – should they have to – cover the monthly payments. Lenders have extended both the terms available to those in retirement, and the maximum ages. Some, like Suffolk Building Society, have no maximum age at all.
It’s simple really, we calculate the useable income by taking a percentage of the overall pension value and spread this over the term of the mortgage. Of course, lenders will need to know what the money is to be used for. Gifting, and purchasing holiday homes/an investment property are two of the reasons a lender will happily provide an alternative solution to taking that initial lump sum. It’s worth considering (alongside other viable options, right)?
More to life than Equity Release
Mortgage advisers have a huge opportunity to better support older borrowers in the later life space. There’s currently a gulf between equity release products, and standard products that are accessible to those in, or going into, retirement.
The gap must close.
Rather than send a customer down just one route – equity release – shouldn’t brokers give equal consideration to standard mortgages which are available to older borrowers? Although not suitable for all, standard mortgages do have advantages in terms of choice and the impact on a borrower’s future estate.
Age is just a number after all!
