Did you know there’s are some specific pension rules you can use to your advantage, to make the most of your pension contributions and the annual allowance? Through pension carry forward, you can still contribute to your pension pot, above the annual allowance.
Read on to find out more.
The pension annual allowance
Firstly, it’s best to understand the annual allowance. This is the total amount you can put into your pension pots each tax year before you have to pay tax. For the tax year 21/22, this stands at £40,000 or your total income, if you earn less than £40,000.
If you’re on a higher income — earning over a threshold income of £200,000 or an adjusted income of £240,000 — then you may be subject to tapering. This is where your annual allowance can be reduced by £1 for every £2 over the adjusted income of £240,000, down to a minimum allowance of £4,000.
As a high earner, it’s highly recommended to work with a professional financial adviser, to ensure that you’re using your pension in the most tax-efficient way. Carry forward can be a useful way to contribute more than your tapered annual allowance if you are a high earner.
What is pension carry forward?
Using pension carry forward could see you contribute more than the annual allowance, taking advantage of any unused pension allowances from the previous three tax years.
You may have unused annual allowance if your pension savings were less than your annual allowance for the tax year. You can check with your pension provider to find out the details of your pension savings, or use an online annual allowance calculator to see if you have any unused annual allowance to carry forward.
There are also plenty of online resources that can help you to understand pension carry forward, such as Close Brothers Asset Management financial planning advice blog posts, for example.
Remember, when it to comes pension and retirement planning, the value of investments can go down as well as up and you may get back less than you invested. Also, any tax benefits will depend on your personal tax position, and rules are subject to change.
How does it work?
First of all, you must have made the maximum contributions allowed for the tax year, to be able to use carry forward from the three previous tax years. If you have unused annual allowances for more than one year, then you will need to use them in order, from the earliest to the latest.
The amount that you can carry forward is dependent on the amount you saved and used of the annual allowance in previous years. This includes the total contributions to your pension from yourself and your employer, as well as any tax relief received from HMRC.
Once you have calculated the amount you can carry forward, you can make the extra contributions to your pension, without having to notify HMRC.
There are also some things to consider when looking at carry forward, including the annual allowances for previous tax years, as these may differ to the amount for the most recent tax year.
When can you use carry forward?
In order to use carry forward, you must have the following requirements:
- A member of a UK registered pension scheme, or a qualifying overseas pension scheme, for the years of unused annual allowance that you wish to carry forward.
- You intend to carry forward any unused annual allowance that does not include unused money purchase annual allowance.
- You have an income for the tax year that is at least, or above, the total contribution you wish to make into your pensions.
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It’s never too early to consider planning for your future, especially when it comes to your pension. Using carry forward can be to your advantage, but it is always best to seek advice from a financial planner, to ensure you are making the most of your pension and the annual allowance
