No longer necessary to buy an annuity

The main advantage with the new rules is that you are no longer compelled to buy an annuity. There has been a significant change with £1 billion taken as cash in April and May by 65,000 people or an average of £15,500.

Although annuities remains as an option and figures released from the Association of British Insurers (ABI) show that over the months of April and May 11,300 people used £630 million to buy annuities, averaging £55,750.

This compares to 2012 when £1.2 billion a month was used to buy annuities and only £100 million into drawdown.

People can now choose other pension options such as selecting a flexi-access drawdown or a fixed term plan and drawdown was used by 10,300 people with £720 million or an average of £69,900.

For those that take the fund as cash, according to Standard Life the main reason most people is to repay debt such as credit cards or mortgages.

Most of these pension funds are small so after a tax free lump sum the additional income would be taxed at 20% in most cases. About half of all these policies are worth under £10,000 and eight out of ten are worth under £30,000.

Interest in accessing pension funds is also increasing with those with final salary schemes wanting greater flexibility. The valuation for transfer purposes is based on gilt yields which have reduced. This has resulted in many abnormally large fund transfer quotes often 50% larger than a year ago making it attractive to consider this option.

Many consider other investments

Research conducted by providers Liverpool Victoria and Prudential has shown that about 10,000 people cash-in larger funds or made partial encashments of much larger funds.

About 97% of pension funds are valued below £50,000 with 2% between £50,000 and £100,000 and only 1% over £100,000.

The majority, about 45%, use the money to repay debts with another 29% spending the cash on holidays or home improvements and the remaining 26% investing in buy-to-let properties.

As pension funds cannot invest directly in residential property, many people are attracted to the idea of diversifying their investments and take advantage of rising property values and rental income.

Even so these investments can be time consuming and extracting enough cash from a pension without paying higher rate tax may mean spreading the withdrawals over several tax years.