First, it’s important to establish what isn’t taxable in your retirement. Of course, the new freedoms entitle you to a 25 per cent tax-free lump sum – but some other forms of income you may receive in retirement are not liable for taxes. This includes income received under the annual personal allowance which escapes taxation. Pension credits, working tax/child tax credits, ISA income, premium bond revenues, lottery winnings and interest from National Savings Certificates are not taxable either.

Taxable income in retirement includes the remaining non-lump sum share of your pension, gross interest gained from bank and building society accounts, income from shares, property or from abroad, and certain state benefits (including Carer’s Allowance, Employment/Support Allowance and Incapacity Benefit). If you’re married, or in a civil partnership, half of the income you personally garner from savings, investments or property held in both your names will be liable for tax. If you’re a cohabiting couple, only your share of joint income will be taxed.

Over-55s can alternatively opt to withdraw their tax-free lump sum, but continue to work – and continue contributing to their pension. Any subsequent contributions will continue to receive tax relief (up to £40,000); up to three years’ worth of unused allowances can also be carried forward. Once you surpass the state pension age, you are no longer liable for National Insurance (NI) contributions whether you continue to work or not.

“If you opt to keep working for an employer after reaching the state pension age, you’ll need to provide your employer with proof of your date of birth – your passport or birth certificate will suffice,” says Paul Evans, technical director at Suffolk Life. “Failure to do so will mean you keep paying NI contributions when you’re not supposed to.”

“If you remain self-employed after reaching the state pension age, you will need to ensure that your self-assessment tax return reflects this change.”

Claire Trott, head of technical support at Talbot and Muir, notes that anyone opting to withdraw their pension not only has to deal with income tax issues, but further tax considerations as well. “If, for example, someone withdraws their pension money and invests it, they face additional tax on the growth of the assets when they are sold,” Trott says.

“This isn’t to say that people shouldn’t take income, more that withdrawal could be a really inefficient means of extracting a pension’s value. There is, however, a strong argument to be made for making such financial decisions within a pension scheme, if possible – and to reduce overall tax liabilities by making little withdrawals often.”

Paul Evans says that paying too much income tax upfront and then having to reclaim the tax at a later date, or wait until the end of the tax year for an automatic rebate, is another potential issue. “This is most extreme should someone take a large single payment from their pension early in the tax year and nothing for the remainder of the year. with a payment in the last month of the tax year.”

Martin Tilley, director of technical Services at Dentons Pension Management, notes that pension money can be inherited tax-free if a retiree passes away before the age of 75; if a retiree passes away after 75, “any withdrawals or lump sums are taxed at the recipient’s marginal rate, meaning that investors should think carefully about who to nominate, should they wish to ensure less tax is paid on any money withdrawn by future recipients.

“As a result, if it’s left as an income to named parties in a will, it’s effectively a tax-free distribution. Even if the recipient pays the top rate of income tax on the inherited money, it’s still a better way of bequeathing pension monies than the retiree withdrawing it, paying income tax on the withdrawal, and then it incurring further inheritance tax liabilities of up to 40 per cent.”