Making the most of unused pension allowances
Planning for retirement can be both exciting and daunting. It’s essential to structure your affairs to make sure you have enough money when you eventually retire. To give your pension pot a boost, one option to consider if your intended pension contributions are more than your annual allowance is to take advantage of the ‘carry forward’ rules for unused annual allowances from previous years and still benefit from tax relief.
The carry forward rules were introduced from 6 April 2011 and allow any unused annual allowance to be carried forward from the three previous tax years. This can be particularly beneficial where you have received a large salary increase, or your profits have been good in a self-employed business, or if you’ve been made redundant or are nearing retirement.
The benefits for high earners
Using carry forward can be very useful if you’re a high earner and affected by the tapered annual allowance, which was introduced in April 2016. The way the tapered annual allowance works is that anyone with an adjusted income of more than £150,000 per year has their annual allowance reduced by £1 for every £2 they earn over £150,000, up to a maximum reduction of £30,000.
To be able to carry forward unused annual allowance from a previous tax year, you must have been a member of a registered pension scheme at some point in that tax year (a ‘member’ includes active, deferred and pensioner members). This can apply even if no contributions were made during that year or if there was a nil pension input amount.
Individual’s relevant UK earnings
Carry forward can’t be used for any year that you were not a member of a registered pension scheme. It’s also worth noting that any contribution made using carry forward does not need to be made to the same registered pension scheme that you were a member of in the previous year. You can only obtain tax relief on pension contributions up to your earnings for the current tax year. This is regardless of the amount of unused allowance you may have.
Maximum allowable contribution
To take advantage of carry forward rules, you must make the maximum allowable contribution in the current tax year (£40,000 in 2019/20). You can then carry forward any unused annual allowances from the three previous tax years.
The amount of annual allowance that you can carry forward will depend on how much of your annual allowance you used in the previous three tax years. When assessing how much of your annual allowance you used in previous tax years, you need to include the total value of the contributions you made to your pension, any contributions made by your employer, and the tax relief you received from HMRC
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Automatically carry forward any unused annual allowance
It’s possible to carry forward any unused annual allowance automatically. There’s no requirement to make a claim to HMRC to carry forward any unused allowance, and there’s no need for the details to be included on a self-assessment tax return if there’s no annual allowance charge due.
From 6 April 2015, the Money Purchase Annual Allowance (MPAA) was introduced. This reduced the annual allowance in certain circumstances. You cannot utilise carry forward if you have triggered the MPAA (unless you have ongoing accrual in a defined benefit scheme).
Are you on track for your retirement?
If you’re a high earner and likely to be most impacted by the annual allowance, the opportunity to sweep up earnings from the three previous tax years may be a welcome retirement funding opportunity. Speaking to a qualified financial adviser could help you build a tax-efficient income for a great retirement.
The value of pensions can rise and fall and you may not get back what you invest. Past performance is no guide to the future. Tax rates are based on current legislation which is subject to change. You should seek financial advice before proceeding with any course of action.