Pension freedom – Martin Lewis's five-minute briefing

Generally not. If you're in your 50s or early 60s you're probably still working towards retirement and should often be focusing on putting yourself in a position to have enough income when you do retire. Keeping the money in your pension hopefully enables it to grow. 

Plus by accessing your funds earlier than needed you can reduce your ability to make future contributions.

Yet you're saying if I want to, I can just take out all the cash?

If you choose to yes, but remember only 25% of it is tax-free. The rest is taxed at your current income tax rate. 

So when they're ready to retire most people will be aiming not to withdraw too much in a year, so it pushes them up a tax bracket.  

For example, you can earn up to £43,000 a year (2016/17) before you pay the higher 40% rate of tax. So if you earned £30,000 then took a taxable £10,000 out of your pension it'd still be at the 20% basic-rate. If you took £15,000 out, £13,000 would be at the 20% rate, the rest at the 40%.

OK so if I don't want to take it all out what can I do?

This will be the most common scenario for most people – and there are quite a few options, some of them can be combined. 

Option 1: Leave it invested in your pension for when you need it. Do this and it's important to understand when you withdraw cash you get 25% of each lump sum you withdraw tax-free. For example, if you had £100,000 and took £20,000 out you'd get £5,000 of it tax-free, the rest would be taxed at your current rate.

Option 2: Take 25% tax-free, then buy a flexible income drawdown product. This is a product you buy that keeps the rest invested so it can still hopefully grow, but you can also use it to take income when needed. 

The tax here is different, you get the first 25% you withdraw tax-free and then the rest is taxed when you take it – which could be useful if you're likely to be in a lower-tax bracket once you're older. 

Option 3: Take 25% tax-free, then buy an annuity. This gives you a guaranteed income each year for the rest of your life.

There are different charges on all of these, and it's important to check them out and always compare different providers.

It is also worth noting that if you take a big chunk out in a month, you may be charged emergency tax on it, as you will be taxed as though you are withdrawing that same amount each month. You can either claim it back with a P50Z or P53, or it will get settled at the end of the tax year.

If you get a means-tested benefit like jobseeker's allowance or pension credit, then pension income can reduce that. 

If you get a lump sum, then this may count towards your savings total – if you've over £6,000 of savings it can reduce your benefit, and over £16,000 it can stop it.

In fact once you reach state pension age, ie, roughly 63 for women and 65 for men, you may lose some benefits even if you don't take your pension because it counts as 'notional income'. For more help on pensions and benefits speak to Citizens Advice and use the 10-minute benefits checkup.

OK so it's not that simple, but you mentioned 'huge risk' at the start, let me guess you're going to warn me not to buy a Ferrari with the cash now?

I don't think I need to. If you choose to do that you know you're probably either rather rich already, know you're being foolish, or that you ain't got long left. Actually, I have two far more serious concerns. 

The first is the opposite of the much-publicised Ferrari one. I'm concerned many will be nervous about releasing the cash in case they're left with none in old age and will therefore sit on it, never spending it, depriving themselves of the benefit and living a worse life than necessary. 

Yet there's another one too. There are a lot of scammers out there cold calling and trying to get people to do all types of unsuitable things, such as release their cash before age 55 (often illegal, if not massively expensive), or cash in final salary pensions when they shouldn't, or a variety of other creative but dangerous causes.