Research by the pension and investment company has shone a light on what has happened to the £17.5bn that has been flexibly withdrawn since April 2015.
It found despite pensions being designed to fund life in later years, only £4.7bn, a quarter of withdrawals, has been spent on day-to-day living.
Around £2.3bn has been spent on luxury items such as holidays, cars and home improvements.
Interestingly, £1.6bn has been withdrawn from pensions to invest in other products such as Isas
Almost £3bn has been used to pay off debt and reduce interest payments.
Tom Selby, senior analyst at AJ Bell, said: “We also know that too few people regularly review their retirement income strategy - tackling this lack of engagement will be crucial in ensuring savers are equipped to make the most out of their retirement pots.
“There are various things that could help here, including boosting access to advice and shifting away from rigid communications rules so savers are nudged into action at points in their lives when they are ready and willing to make decisions.”
The data found parents or grandparents have spent £1.2bn to help children, while the buy-to-let market (BTL) has had a £1bn injection over the past three years with many people using pension withdrawals to invest in property.
Interestingly, £245m of withdrawals have been spent on entertainment such as eating out, season tickets or gambling, while £60m has been used to pay for care.
This comes as the UK regulator, FCA, prepares to publish the long-awaited Retirement Outcomes Review report in response to the pension freedoms to find out the impact of the radical shake-up of retirement fund access in 2015.
Mr Selby, added: “With roughly two people now entering drawdown for every one person who buys an annuity, the regulator understandably wants to ensure savers aren’t sleepwalking into a bad retirement income deal.
“Unfortunately to date the FCA’s thinking has been stuck in the past, viewing drawdown as a ‘product’ similar to an annuity and suggesting interventions – in this case so-called ‘default pathways’ – to solve the perceived problem that drawdown customers aren’t shopping around before they buy.”
However, AJ Somal, chartered financial planner at Aurora Financial Planning, said spending retirement money on luxury products can be a concern.
He added: "I have not really come across clients using their pension pots to fund luxury lifestyles, replacing an old car with a newer car of the same type using the tax free cash is common, but is this luxury lifestyle.
"Withdrawing funds to invest in other products is a potential concern, as clients could be making bad decisions if they haven’t taken any independent financial advice, and have incurred unnecessary income tax on withdrawal."