Savers have cashed in billions from their pensions since the freedoms, but new research suggests many risk tax penalties or low rates by keeping the money in bank accounts or Isas.
A study of 370 consumers who have accessed their pension since the pension freedoms started in 2015 shows that while nearly £3bn has been used to pay off debt, others have taken a less financially sensible route.
At least £4.5bn in pension savings is now either in low yielding current accounts, or has been invested in other products such as Isas.
AJ Bell senior analyst Tom Selby says: “This might not be a problem in the short-term – indeed it makes sense to have some ready-cash available in most cases – but it almost certainly isn’t an advisable long-term investment strategy, particularly with interest rates at record lows and inflation returning to the UK economy.
“We also know that too few people regularly review their retirement income strategy – tackling this lack of engagement will be crucial in ensuring savers are equipped to make the most out of their retirement pots.”
Another £2.3bn has been used to fund luxuries like holidays, cars and home improvements, and only £60m of the total £17.5bn in withdrawals has been used to fund care.
The buy-to-let market and children from wealthier families have been the main beneficiaries of the freedoms withdrawals, with £1bn invested in buy-to-let property and £1.2bn used to help children.