Mr Connolly adds: “Remember, money in a pension will continue to grow in a tax-efficient environment, and will not be subject to inheritance tax. Once you take this money out of a pension it is liable to these taxes.”  You don’t have to take the maximum amount  Some people may only want to use 10pc of their pension fund now. This does not mean that all later withdrawals are automatically subject to tax. You can now stagger these tax-free payments over a number of years – 25pc of each will be tax-free.  Protect your money from inflation  If you are not going to spend all this money at once, you need to think about how you would invest the remainder. If you are going to keep it in a bank or building society account, its value over time is likely to be eroded by inflation.  Get the best rate on cash savings  Investments might offer the better returns over the long term, but share prices are volatile and the value of your savings can fall. If you do not want to take this risk, stick with cash – but make sure you are getting the best rate. Utilise short-term bonus rates and fixed-rate deals. The latter also “lock” your money away, so you won’t spend it too easily. Move your money when such a deal ends.  Don’t have more than £85,000 on deposit with any one bank; this is the maximum amount protected by the Government in the event of a bank failure.  If you do want to take the maximum tax-free sum, one option is to invest it in an Isa. Here you have the option of investing in shares or cash and, unlike a pension, the income you take is not subject to tax. Isas can now be left to a spouse, without any need to unwind this tax-free wrapper. However, they do form part of your estate for inheritance tax purposes if left to other heirs.
Reached 55 and pondering the idea of a tax-free lump sum? Here are five things to remember before plundering your pension pot