Increasing numbers of over-fifties short of cash are withdrawing some of the tax-free cash lump sum from their personal pensions.

Advisers Annuity Direct have helped people to withdraw sums as small as £2,500 under rules permitting this that came in two years ago. 'We have started to see a demand for "partial retirement funds",' says director Stuart Bayliss. 'We are doing quite a bit of this now.'

Most people taking advantage of the rule change are relatively well-off, but are feeling the pinch in the current economic climate: the self-employed or estate agents, for instance, who earned well enough to build up a decent pension over the last decade but whose income has taken a dip lately.

Scottish Life and the Prudential are among the insurers that have launched pension plans that make it easy and fairly inexpensive for investors to take out cash sums.

Scottish Life's Income Release plan, unveiled last December, allows people to take a tax-free lump sum without the need to take income and then continue to save for retirement, giving them the opportunity to 'accumulate as well as decumulate'. 'Among people doing this in their mid-fifties, the majority take the lump sum and no income,' says Keith MacPherson, Scottish Life's head of individual business.

Before this kind of product came on the market, plan-holders were often hit with hefty charges and a lot of paperwork if they wanted to take the cash. The option to withdraw a lump sum without taking income was made possible on 6 April 2006 - 'A-Day' - when the UK's restrictive pensions regime was suddenly made more liberal.

A number of insurers still have to launch pension plans that take account of this new freedom, but when they do they will be similar to those by Scottish Life and the Pru.

The rules allow fundholders to take a tax-free cash lump sum worth up to 25 per cent of their total plan value once they have reached the age of 50 (or 55 when the rules change again in April 2010). In the past, most people waited until 60 or 65 and took the cash at the same time as they bought an annuity and started receiving pension income from it. Now, however, experts such as Bayliss and Laith Khalaf of advisers Hargreaves Lansdown expect many more people to take advantage of the A-Day changes.

'You can do this and still have growth prospects,' says Khalaf. 'By taking the cash, you have not ripped down the rest of your fund.'

Of course there are dangers associated with taking the tax-free cash early - in particular that the cash is not there for you to call on in future. No doubt, there will be people who take it, spend it and come to regret it 10 years later.

The people who should be most cautious about taking their cash early are those in final-salary or other defined-benefit schemes run by employers, whose schemes offer a pension based on a percentage of salary, rather than on the proceeds of an individual pension pot. Although employees in such schemes also qualify for a tax-free cash lump sum, they will be unlikely to access it early without having to take their pension early. And taking their pension early would, almost certainly, mean getting a reduced pension. 'It is down to the scheme rules,' says Khalaf.

Prudential is hoping that people in their fifties who take tax-free cash now will be able to boost their pension prospects again by making more contributions to their plans in future.

'Advisers are being very careful about these products,' says Julie Mulvanny, head of business development for pensions at the Pru. 'If you are taking the cash to go on a big holiday, you have to remember that the money won't be there in future. But there is obviously a big thing going on now with people taking the tax-free cash to pay off debts.'

The value of my pension seems to drop by the day. Is it worth putting any more money into it in the current economic climate?

Pensions have taken a battering over the last year, compounded by last's week's stock market drama. The value of the average personal pension will be down about 20 per cent since the start of the year. However, although markets are very volatile, you shouldn't stop saving for retirement altogether. Even if you don't want to invest in the stock market right now, you could always store your money in your pension scheme's cash fund. The important thing is to put something away.

If you still have some way to go until retirement, it makes sense to put some of your money into equities, as over the long term they tend to perform much better than cash.

Where is the best place to store money in these troubled times? If we have some savings, which banks should we move our money to?

The worst thing savers could do is to create a run on banks by withdrawing all their money from one provider to put it elsewhere. Wherever your money is, don't forget that you are protected under the Financial Services Compensation Scheme for the first £35,000. If you are feeling nervous about your money, then the safest providers remain those that are government-backed, namely NS&I and Northern Rock. Regardless of which provider your savings are with, you need to make sure you are earning at least 5.9 per cent if you are a basic rate taxpayer, or 7.9 per cent if you are a higher rate taxpayer in order to beat inflation and tax to earn a real return on your money.

If a bank goes bust, what happens if you have debts, such as a mortgage, with them? Are they allowed to call it in?

If your mortgage provider goes bust and it is taken over by another provider, your mortgage would continue with payments at the same level and the original terms and conditions would apply. With overdrafts, however, if your bank falls into administration, then the administrators have the right to call back the money you owe at any time.

I was planning to buy my first home to take advantage of the newly raised £175,000 stamp duty threshold, but it all looks a bit dodgy now. Should I wait?

Wait, but watch the market. There is near-unanimity among property experts that prices will fall further until at least early next year. In any case, mortgage availability looks certain to remain very limited until well into 2009. Many observers believe it will be March before even the bravest buyer thinks the market has reached the bottom. Then some will start buying, possibly giving prices a boost. Until that time, developers will keep offering ever larger incentives to first-time buyers, and sellers of second-hand homes will have to shave more off their asking prices if they want to shift their properties. And, of course, the government's £175,000 stamp duty threshold will stay in place until autumn 2009 at least. So do nothing now and review the position in the new year.

Should I take out most of my savings before my building society implodes and use the money to make a lump sum payment on my mortgage instead?

There is usually a good argument for using your savings to reduce your debt. This will save you a lot of money in the future by reducing the interest you are paying and enable you to pay off the mortgage early. However, you shouldn't do this because you are panicking (see question on safety measures to protect your money) and it is important to keep an 'emergency reserve' in a savings account. The rule of thumb is that this should cover between three and six months' worth of bills.

The gap between private and public sector workers' pensions is growing as household saving rates continue to decline, according to a report published yesterday.

Financial adviser Hargreaves Lansdown said official figures show the credit squeeze has taken its toll on Britain's appetite for retirement, which means that many people will have much lower retirement incomes than they expect. More than a million workers stopped paying into their personal pension plans over the past year, according to a report yesterday.

Figures from HM Revenue & Customs showed that over the past year the number of people paying into a personal pension dropped by a million to 7 million.

The figures also confirm that the average pensioner will receive only a modest boost to their state pension from their savings when they retire. In 2007 the average pension fund used to buy a retirement income was £33,500, which at today's annuity rates for a 65-year-old male would produce an income of £1,380 a year.

According to the Office of National Statistics, on average a single pensioner receives about £3,000 a year from private pensions; this includes the value of their occupational pension benefits such as final-salary schemes.

The household savings ratio, which measures the proportion of income saved each month, has also dropped in the past year to 1.1% - the lowest level since the 1950s. In 1993 the figure stood at 10.7%.

Tom McPhail, the firm's head of pensions research, said the decline in saving highlighted the growing gap between public and private sector pension provision.

He said the government's refusal to put aside money to fund public sector pensions meant they were becoming increasingly unaffordable and called for a review along the same lines as Lord Turner's Pensions Commission.

The report argues that reforms to public-sector pensions have done little to ease the burden of funding schemes that are largely left to future generations to maintain. It accuses the government of allowing what it calls the "big five schemes" in the NHS, the armed forces, the police, the teaching profession and the civil service to remain unfunded and therefore a burden on taxpayers in decades to come.

A combination of baby boomers reaching retirement age and a promise to pay a guaranteed pension income of two-thirds final salary could send public-sector spending spiralling. Official figures show the government calculates that unfunded promises to pay public-sector pensions amount to £650bn. However, actuaries say the figure is nearer £980bn.

McPhail said: "A minority of private investors are funding their own pension adequately, very often with the help of their employer. For millions of people though, the UK's retirement provision is beginning to resemble a car crash in slow motion."