Pensions and carry forward

Your pension may well be the best investment you ever make. Thanks to the support provided by the taxman, every pound you put in your pension pot grows with tax relief, even before your fund manager gets to work to invest it on your behalf.

As per Tax year 2020/2021 Tax relief amounts are as follows:

• 20% for Basic Rate
• 40% for higher rate and
• 45% for additional rate taxpayers

It is the government’s way of encouraging you to save for your old age. It is so generous that they have to impose limits on the amount of money you can put into your pension to avoid people misusing the system – and the treasury running out of money.

These limits are clear. There is a lifetime allowance for the amount you can have in your pension pot without incurring additional tax liability, and for the current tax year (2020/21) it is £1,073,100. Perhaps more important for most of us is the annual allowance, which is £40,000, or the total that you earn, whichever is the lower.

You may find yourself in the position of having spare funds which you would like to invest in your pension, especially if you are approaching retirement age, from 55 onwards. But the rules will prevent you from doing so.

Carry forward may provide a solution.

What is carry forward?

Carry forward is a concession from the government that lets you make use of any annual allowance that you did not use during the three previous tax years. You can enjoy all the tax benefits you would have if you had paid in then.

You simply need to have been a member of a registered pension scheme during that time.

Carry forward may be particularly useful if you are self-employed and your earnings change significantly each year or if you’re looking to make large pension contributions.

How it works

To use carry forward, you must make the maximum allowable contribution in the current tax year (up to £40,000 in 2020/21 dependent on your earnings) and can then use unused annual allowances from the three previous tax years.

The annual limits still apply. You can’t receive tax relief on contributions in excess of your earnings in a tax year and you only receive higher rate tax relief on the tax you have paid.

If a particular tax year’s unused annual allowance is not fully used, it can only be carried forward for up to three years, after which it is lost.

The annual limit still applies to the previous years, so if you use carry forward, you will only receive tax relief on contributions that you pay into your pension up to your earnings in the tax year that you pay them.

If you run your own business

If you run your own business, things are a little more complicated. You can make contributions as an individual, if you have paid yourself a large enough salary, or direct from the company, regardless of the amount of salary or dividends you have paid yourself.

What should you do?

Anything to do with tax can rapidly become complicated, and if you are thinking about using carry forward to make the most of your pension pot, it makes sense to get some expert help to steer you away from any minefields that could end up costing you money.

At Continuum we have tax experts who can help you with your carry forward plans – and can not only help avoid the pitfalls, we can help you look at ways to make your pension pot work harder for you.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement strategy, you should seek independent financial advice before embarking on any course of action.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, all of which are subject to change in the future.

The Financial Conduct Authority does regulate taxation advice.