This week our reader wants to know how to supplement their income with retirement funds.

Carl Lamb of Smith & Pinching responds.

  • Reader question:

I am about five years short of my official retirement and want to start to scale my working hours down.

This will clearly reduce my income so I would like to look at the possibility of taking some of my pension savings to support my income.

I have four small pension schemes from previous jobs that are worth between £5,000 and £10,000 each plus my main personal pension, which I’ve been building up for some years now and is worth about £280,000 now.

Should I draw from my old schemes first or start off with my main scheme?

  • Carl Lamb of Smith & Pinching:

There are lots of factors to take into consideration here and I recommend you get specific advice about how to manage your pension schemes in this critical period before you fully retire.

There are rules about taking small pension schemes that may make drawing from those first the right way forward, but it will very much depend on the type of schemes they are and their rules, as well as your financial circumstances including other savings and investments you may hold.

Under the Small Pots Rules, you are allowed to withdraw your money from up to three “defined contribution” pension arrangements – ie pension schemes where the value is based on contributions, tax relief and growth – provided they are worth no more than £10,000 each.

If your schemes are classed as workplace schemes (also known as occupational schemes), then you may be able to take your money out of all four – there is no limit on the number of qualifying occupational schemes you can cash in.

However, the scheme rules must allow for this to happen, so you will need to check with the pension provider.

You could draw from your main personal pension but if you start to draw flexible benefits from it, the amount you can continue to contribute to your pension savings each year – your annual allowance – will be reduced from £40,000 to just £4,000.

The reduced annual allowance isn’t triggered if you cash in your small pension pots.

If your pension arrangements are “defined benefit” schemes where the benefits are accrued according to the length of service and your salary, the rules are different.

These are known as the Trivial Commutation rules: they do allow withdrawals but only if the total value of the benefits from all your pension arrangements is less than £30,000.

Please get advice: it’s really important to plan your withdrawals carefully and to ensure that you take into account your potential income tax liabilities.

Pension withdrawals are be taxed as income, although 25 per cent of your withdrawals may be tax free.

Large lump sum withdrawals could tip you into a higher rate tax bracket: in some circumstances it may be better to look at other sources of income such as savings and investments first before touching your pensions.

Any opinions expressed in this article do not constitute advice.

They assume the 2020/21 tax year and are subject to change. The value of an investment can fall as well as rise and is not guaranteed.