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The freedom to take 25% of your pension as tax-free cash is highly prized and many retirees can't wait to get their hands on it, but experts warn they need to tread carefully.

New research shows many over-55s rush to take the full lump sum as soon as they retire, often viewing it as a reward for decades of saving. That's understandable, but it can come at a cost if it leaves them short of income in later life.

Catherine Foot, director of the Standard Life Centre for the Future of Retirement, said people typically view tax-free cash as a separate pot of money, rather than treating it as part of their overall retirement savings.

Many have a clear plan for the money, using it as a bonus pot to pay for an expensive treat such as a dream holiday or new car, but Foot warned: "This carries the risk of depleting the pension pot too early if not carefully managed."

Others plan to use the cash to simplify their finances by paying off a mortgage or other debt and create a "clean slate" for retirement.

As a result, two-thirds feel confident about deciding when and how to take their tax-free cash, but less confident about how to generate long-term income from their pot.

"The decision to take a lump sum in full may be right for many, but it also carries the risk of depleting a pension pot too early if not carefully managed," Foot said.

Not everyone will splurge. Some plan to reinvest the money elsewhere, or continue working at a slower rate, using tax-free cash to top up their income. Stretched withdrawals over the years could help minimise income tax bills.

Retirees need to plan carefully. That tax-free lump sum may feel like a windfall, but that doesn't mean you should spend it all at once.