Almost four in 10 people aged over 55 have no plan for how they would use the tax-free cash available from their pension, according to new research from Hargreaves Lansdown.

The survey of 500 people aged over 55 found that 38 per cent had no plans for their pension tax-free lump sum, despite being able to access up to 25 per cent of their pension savings tax-free.

A cash ISA was the most popular intended destination for the money, cited by 17 per cent of respondents, while 16 per cent said they would use the cash to supplement their retirement income.

However, only 10 per cent said they would invest the money, with 8 per cent opting for a stocks and shares ISA and 2 per cent planning to invest outside an ISA.

The research also found that 14 per cent would place the money into cash savings accounts, while 7 per cent would leave it in a current account.

Commenting on the findings, Hargreaves Lansdown head of retirement analysis, Helen Morrissey, warned that taking the tax-free cash without a clear strategy could lead to poor financial decisions.

“The ability to take up to 25 per cent of your pension tax-free is a huge plus point, but you need to have a plan for what you want to do with it,” she said.

“Taking it all at once just because you can puts you at risk of poor decision-making, and you may not make the most of it.”

Morrissey noted that while cash ISAs, home improvements and holidays were among the most popular intended uses of the money, the proportion of people without a clear plan remained concerning.

She also cautioned that savers holding large amounts of pension cash in low-interest accounts risk seeing the value of their money eroded by inflation over time.

“A further 7 per cent said they would leave it in a current account,” she noted.

“This move risks leaving money in accounts paying a poor level of interest where its purchasing power is eroded by inflation over time.”

The research also suggested that forthcoming changes to inheritance tax may be influencing retirement planning decisions.

Almost one in 10 respondents (8 per cent) said they would use their tax-free cash to make gifts to family members.

Morrissey suggested this could be linked to planned changes from April 2027 that will bring unused defined contribution pension assets within the scope of inheritance tax.

However, she warned retirees against giving away too much too quickly.

“Gifting can be a great way of helping your loved ones to reach their financial goals that bit quicker while also reducing an inheritance liability,” she stated.

“However, it’s important not to gift too much too quickly - or feel you must - as you may leave yourself in financial difficulties later.”

Morrissey also highlighted phased drawdown as an alternative to taking the full tax-free lump sum at once, arguing that it could help retirees manage their tax position while giving them more time to decide how best to use their savings.

“Being able to take your tax-free cash is a tempting prospect, but you don’t have to take it all at once,” she added.

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