Stick to withdrawal rules

In this era of pensions freedom, it's easy to see why people would think of their pension plans as bank accounts they can dip into at will. But while people now have much greater freedom in how they use their savings once they retire, those who break the rules face hefty tax penalties and regulators warn thousands of people are being tricked into doing just that by rogue advisers.

Pensions legislation defines "authorised payments" from private pension schemes very clearly, whether you're putting money into a company scheme or an individual arrangement such as a stakeholder pension or a self-invested personal pension (Sipp). You will almost never be able to access these pots until you reach age 55 and your money must be used to provide retirement income either as a pension, or as a lump sum benefit paid when the pension begins.

Any payment that doesn't meet these criteria including almost all early withdrawals are "unauthorised payments". You will automatically have to pay 40% income tax on these withdrawals, no matter what rate of tax you normally pay. Plus, if you take out more than 25% of your fund in a year as an unauthorised payment, there's an additional 15% charge. In other words, more than half your withdrawal will disappear in tax charges before you can touch it. The levy rises to 70% if you don't declare the withdrawal to HMRC.

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Naturally, cowboy pension advisers neglect to mention these penalties when selling so-called "pension liberation" or "pension unlocking" schemes. Nor do they declare the exorbitant fees they pocket. In one recent case, a saver accessed their entire £150,000 pension savings in order to pay off their debts. Their tax charges totalled £82,500 and the adviser took a £10,000 fee, leaving the saver with just £57,500 in cash.

The Financial Conduct Authority's advice on the matter is unequivocal. "You should be especially wary of any scheme offering to help you release cash from your pension before you are 55, as it is almost certainly a scam," the regulator warns on its website.

Don't pay too much tax

If you're using what's left of your savings after the lump sum to buy an annuity income, the provider should deduct the right amount of tax from the amount it pays you each month. The rate you'll pay will depend on how much pension you're receiving and what other income you have.

If you're drawing down savings through an income drawdown plan, tax should be one consideration when deciding how much to withdraw and when. For example, you can take all your pension savings out straight away, but that could tip you into a higher band of income tax, at least on part of the money.

The more tax-efficient alternative is to make withdrawals that keep you within a particular tax band, but remember to take into account other income you have coming in, including any state pension benefits you might have.

For example, someone cashing in a £250,000 pension fund in its entirety this year would get a tax-free lump sum of £62,500. The remaining £187,500 would be taxable, including a 40% charge on the value between £43,000 and £150,000 and a 45% charge thereafter. If, instead, they took the taxable part of the fund as a series of withdrawals over five years, all of the cash would fall within the 20% basic-rate tax band. The saving is worth more than £28,000.