Lamborghini or Caribbean cruise? Fitted kitchen or new conservatory? These are some of the more appealing dilemmas that millions of over-55s are now wrestling with following the government’s radical shake-up of Britain’s retirement savings market.

The new rules came into effect on Easter Monday, dubbed “pension freedom day,” and will give retirees access to their pension pots rather than forcing them to use the cash to buy an annuity.

It means those aged 55 and over now control their own retirement funds and can, if they wish, withdraw the whole lot in one go, to spend as they please.

Not everyone is included – funds will remain locked up for those in final salary schemes who have already started to receive their pension. But estimates suggest that a massive £350 billion (€480 billion) of retirement money is now available under the new rules.

Many of Britain’s leading pension providers manned their offices on bank holiday Monday, amid some fears that switchboards and websites might be unable to cope with the flood of enquiries. The Easter sunshine proved too much of a distraction, but firms reported a steady stream of calls, rising to a flood yesterday from people keen to take advantage of their pension freedom.

Financial services group Hargreaves Lansdown reported a huge increase in the number of calls to its pensions hotline, with the firm’s head of pensions research, Tom McPhail, predicting that, across the pensions system as a whole, some 400,000 investors will take advantage of the new rules in the opening months of the financial year.

Fast living

Chancellor

George Osborne

unveiled the surprise shake-up of the industry in his 2014 budget, and since then there has been much talk of spendthrift pensioners blowing their retirement funds on luxury cars and fast living. Once the cash is gone, pensioners would then be forced to fall back on their state pension for support.

It was pensions minister Steve Webb who first raised the prospect of pension savings being spent on Lamborghinis. A year ago, he insisted he was happy for people to spend their cash as they wanted, even if they spent it all. It appears he's still relaxed about the prospect of retirees blowing their life savings on luxury motors – speaking at the weekend, he said: "If you want to be able to enjoy it, why shouldn't you?"

But he did caution people against making snap decisions. The new pensions rules have done nothing to solve the age-old dilemma for retirement savers – just how long will they be drawing their pension? Money spent now, whether on a new car or a cruise, will obviously reduce the funds available to cover what could, with luck, be a lengthy retirement.

And there are huge tax disadvantages to cashing in your pension pot in one go. Up to 25 per cent of the funds can be withdrawn without attracting tax but the government will take its cut above that threshold, running the risk of pushing people into a higher tax band.

Once removed, the pension cash loses its tax free advantage and any new investment is likely to be subject to tax. The campaigner and pensions expert Ros Altmann has warned of a "triple tax whammy" for those who cash in their entire pension fund: "Leave it there," she said. "There are huge tax benefits from having money in a pension."

Annuities

While the temptation to squander their funds will be too strong for some to resist, despite the tax drawback, some over-55s are still expected to opt for annuities, preferring the certainty of a set monthly income. Others will withdraw funds to put into alternative investments with the aim of producing a better return. Investors will need to be on their guard – the prospect of £350 billion up for grabs is certain to attract an army of fraudsters out for easy pickings.

One of the most popular investments is likely to be property. As if life wasn’t already tough enough for first time buyers, weighed down by student loans and struggling to save for a deposit, they are now going to be in competition with older buyers for the limited stock of start-up homes available on the market.

Property experts are predicting a rush by retirees into the buy-to-let market, as they bet monthly rent will beat anything an annuity can offer. Estate agents report growing interest in such properties from older buyers, and have even coined a new term for them – “granlords.”

Fiona Walsh is business editor of theguardian.com