One in 10 people retiring this year expect to withdraw their entire pension savings as one lump sum, thereby risking to be hit with a hefty tax bill, research has found.
Prudential’s class of 2018 study showed people are not necessarily planning to spend all this cash, as the main reason given by 71 per cent of those taking all their funds was to invest in other areas such as property, a saving accounts or an investment fund.
The research also showed that one in five retiring this year will risk avoidable tax bills by taking out more than the tax-free 25 per cent limit on withdrawals.
Meanwhile, two-thirds of people are planning to retire early.
Stan Russell, retirement income expert at Prudential, said: "Pensions freedom allows savers to have the flexibility on how and when to spend their money without being penalised by the tax system but it is worrying that so many will withdraw more than the tax-free lump sum limit.
"The risk is even greater for those who are taking all their pension fund in cash. They not only face paying more in tax than they have to but also put their long-term retirement income security at risk."
Since the launch of the pension freedom reforms in April 2015, more than 1.1 million people aged 55 and over have withdrawn about £15.744bn in flexible payments.
A popular use of the cash is also for holidays, with 34 per cent planning to spend the money on trips, according to Prudential.
About a quarter will spend the money on home improvements, while 20 per cent said they would gift the money to their children or grandchildren.
Alastair Rush, principal at Rutland-based Echelon Wealthcare, said: "I can see, to an extent, why some boomers would want to invest in property if it helps their children get on the ladder, but surely the buy to let bubble has popped.
"You can only speculate on the wisdom of withdrawing all of one’s money from such an advantageous wrapper such as a pension to place it in a savings account, especially if more people are retiring early.
"The bottom line is, it’s people’s money to do with as they see fit, but I would have thought that the Pension Wise service, if it was working as advertised, would be cautioning against cashing in a pension and parking it in an inflation exposed savings account."