Evidence is mounting that people are cashing in pensions without understanding their options or their tax bill - but it will be six months before the government responds to the fall-out from April’s pension freedoms.

Royal London, the UK’s biggest mutual insurer which runs its pension operations from Edinburgh, has said it is concerned that many people cashing in their pots are “unknowingly potentially suffering financial detriment”.

In a survey of 800 Royal London customers who had used the new pension freedoms, 69per cent had chosen to take all of their pension pot as a cash lump sum.

“This means that, in most cases, 75per cent of the cash sum those customers received was subject to an income tax charge,” the insurer said.

Of those surveyed, 16 per cent said they intended to use the cash to clear their mortgage or other debts, which should improve their overall financial position. However 32per cent intended to withdraw money in order to park it all in an alternative savings or investment vehicle. Of those questioned, 23per cent intended to leave the cash in a deposit or cash Isa account.

Fiona Tait, pension specialist at Royal London, said: “The research indicates that around a third of people who are withdrawing cash do not appreciate that their options could include a switch to a similar investment fund within their existing pension plan, without paying the tax charge for full encashment, or switch to an alternative provider which allows partial encashment.

“Customers aged over 55 would still have access to their savings whenever they needed it, and withdrawing money over time is likely to be much more tax efficient.”

Royal London is calling for the Financial Conduct Authority to consider raising the prominence of this option in its future review of the rules and guidance. It says: “This would help a wider number of customers to understand the potential benefits of continuing to keep cash in a pension. It would also help to improve customer awareness of the consequences of cashing in their pension pot, particularly if they only wish to have the funds sitting on deposit.”

Ms Tait added: “We are extremely concerned that the findings from the research may reflect a wider industry trend.”

Treasury minister Harriet Baldwin earlier this month promised a package of reforms which “will empower and equip all UK consumers to make effective decisions about their finances”.

But the review of how pensions advice is, or is not, delivered will only report in time for next March’s Budget. The need for urgent action is implied in the minister’s avowal that the Treasury and the FCA will thereafter “facilitate the establishment of a broad-based market for the provision of financial advice to all consumers”.

A regulatory environment which enables firms “to compete and innovate to fill the advice gap” is also promised alongside a “set of principles to govern the operation of financial advice.”

More than 40 per cent of lower income households do not know where to turn for advice or guidance on their pension savings, according to a recent Scottish Widows report.

The provider asked more than 5,000 UK adults where they would go for guidance and advice on their savings in a survey carried out before the general election.

Just 16 per cent of low earners said they would seek an adviser, while 26 per cent said they didn’t know where to turn, and only six per cent again said they would visit the government Pension Wise website. However, some 42 per cent admitted they did not know who they would turn to for advice or guidance.

Pension Wise offers face to face sessions in a service run by Citizens Advice.

But those with bigger pensions need help too, according to wealth managers Brewin Dolphin.

Its survey of over 2000 adults found that “the taxman could be the biggest beneficiary of a system that hands people responsibility without appropriate training”.

Almost one in four said they would put their pension in a savings or bank account, while 57 per cent said they would be unlikely to seek financial advice on whether to withdraw a lump sum from their pension

Brewin said: “Sensible use of an Isa, investing in a tax-efficient manner and withdrawing a pension in stages could provide as much as five years’ worth of additional cash in retirement. The state of ‘under-preparedness’ is such, however, that many could simply throw this extra money away.”

Someone with a pension pot of £163,000 (the average quoted by people who knew what theirs was worth) “could end up paying an unnecessary £50,000 to HMRC”, the wealth manager says. Bad decisions could lead to people “living over 15 years on the basic state pension, when they could have had a far more comfortable retirement”.

Only six per cent of 55-65 year olds said they would invest their pension pot in gold, shares or bonds, six per cent would keep it in cash, 10 per cent would investin property, and 14 per cent would spend it on holidays and other leisure activities

Stephen Ford, head of investment management at Brewin Dolphin, said. “Despite having significant pension pots in many cases, most people won’t take advice and many are planning to simply withdraw their money into a poorly paying savings accounts that will leave them with an eye-watering tax bill and no inflation protection.”

A poll for website Money.co.uk of 669 over-55s with a pension found that only one fifth would be willing to pay for advice, with the average maximum budget £253.

A recent analysis by Hargreaves Lansdown found the average cost of an initial financial review was around £500.