SERIOUS ERROR! 14.7.1 didn’t fix the problem!

Turn off "Unlock with Apple Watch" under iPhone settings -> Face ID & Passcode (for touch ID, it may be slightly different title).

If you want both, you may be able to do the following dance (assuming you have Face ID; not sure if this will work for Finger Print Reader iPhones)

iPhone screen blank (screen off)

Raise Apple Watch until the numeric passcode unlock screen appears.

Then immediately wake the iPhone and unlock it.

If you wake the iPhone too early, it will not work.

If you wait too long to wake and unlock the iPhone, it will not work.

See the replies to:

I have an iPhone XS Max. Prior to install… - Apple Community

I've noticed that the "unlock while wearing a mask" still doesn't work.