The party said it wanted to help people struggling to buy a home.
Not everyone could afford to be the "bank of mum and dad" and give their children large deposits to buy a home, it warned.
Under the proposals, people would use the lump-sum portion of their pension as a guarantee towards part of a child or grandchild's mortgage. They would not have to be retired but would lose their money if their offspring defaulted on the mortgage.
Only the lump sum could be used to ensure the rest of the pension was protected.
But experts expressed concern that pensions could be put at risk if homeowners defaulted on their mortgage.
Critics also warned that poorer families without significant pensions pots would be at a disadvantage if the scheme pushed up house prices.
Deputy Prime Minister Nick Clegg defended the proposals yesterday, saying they were part of his party's plans to make the economy fairer.
His party believes the plan could help up to 250,000 people in the UK.
Party sources admitted details were yet to be worked out, but they hoped the scheme could be running before the next election in 2015.
Mortgage lenders have been sounded out and are said to be in favour.
The LibDems stressed the scheme was a Government announcement, signed off by Conservative colleagues.
Danny Alexander, the LibDem Chief Secretary to the Treasury, said many parents did not have cash to help children onto the housing ladder.
"But in many cases they will have built up a substantial pension pot," he said. "What we want to do is for parents in that category [to be able to] use that lump sum which they will get when they reach retirement age, to guarantee part of the mortgage, the deposit on that mortgage, precisely to help their kids or grandkids."
Otto Thoresen of the Association of British Insurers warned: "Pensions are designed to mature into a decent retirement income, not for other purposes."
The National Association of Pension Funds said tensions in the housing market would need to be worked out before such a scheme could work.
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