A common pensions question people ask is what to do with the tax-free cash from their pension when they retire. While the main purpose of a pension is to give you an income throughout your retirement, you can take out lump sums whenever you want from the age of 55. Up to 25% of the total value of your pension can be withdrawn tax-free (up to a maximum of £268,275 for those with the biggest pensions).

This can be a tempting prospect, but you need to make the most of it.

More than one in four have no idea what they want to do with their tax-free cash, according to a recent Hargreaves Lansdown survey of some of their clients.

Don’t just take your tax-free cash because you can — you need to have a plan for what you want to do with it.

Putting it into a bank account might work if you are using it as part of a planned retirement income strategy — for instance to support your income needs until state pension age or to allow you the flexibility to leave your pension fund untouched during a period of stock market volatility.

Read more: How much do you need to save for retirement?

Retirees should keep between one- and three-years’ worth of essential expenses in an easy access bank account to deal with such situations. However, if you are just taking tax free cash for the sake of it then low interest rates can nibble away at its purchasing power over time and you can risk frittering it away.

Of those who did know what they wanted to do with their tax-free cash, home renovations were a popular choice, with one in 10 deciding they want to use the money to spruce up their home, according to the survey.

Holidays and cars were also popular choices. It’s a sensible approach to use the tax-free cash from your pension to tackle one-off costs that you will find harder to save for on a pension income. However, they won’t generate income in the future.

Others want to use it to help family members onto the property ladder or to build a nest egg. This can be a great use of this cash, but it’s really important not to overcommit to your loved ones. This could potentially leave you struggling financially in retirement — especially if you needed some form of nursing care when you are older.

It’s key to remember you are under no obligation to take your tax-free cash at age 55 and you also don’t have to take it all in one go. It’s possible to take it in instalments as needed throughout your retirement.

Read more: How to get the most from an annuity in retirement

Taking your tax-free cash in segments allows the rest to stay invested for longer, where it has the potential to grow further, possibly enabling you to take a larger tax-free cash sum overall.

It's also worth pointing out that money kept within a SIPP or pension is usually not subject to inheritance tax. Taking it from this environment and putting it into an ISA or bank account has the potential to leave your family with a surprise bill.

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