T he main beneficiaries of the pensions freedom reforms are likely to be those who have built up relatively large pension pots, who will be using this freedom to avoid paying 40% tax when they draw it down under the new freedoms.

An example of this is if someone had a £200,000 pension pot, they could cash it in from 6 April 2015 and have £50,000 tax-free, but the remaining £150,000 would be liable for Income Tax. This means that, depending on the individual’s personal allowance and other earnings, a lot of it will be subject to 40% tax – as much as £53,600.

But if the person decides to take the pension instead as £50,000 each year for four years, then each year they will receive £12,500 tax-free and be liable for Income Tax only on the remaining £37,500, which could be as low as £5,500. So instead of paying more than £50,000 in tax, the person pays around £22,000.