Keep calm & carry forward

In last week’s Budget, Chancellor Rishi Sunak announced a freeze on the pensions lifetime allowance for five years. While this wasn’t the attack on the higher rate of tax relief that many had feared, it will still impact how people save. And while pensions may have mostly survived the latest threat, the Chancellor has made it clear that there will be some hard decisions to be made in the future, therefore higher earners who are in a position to do should consider maximising pension contributions in advance of any potential future changes. While the annual pension allowance for most people is a gross amount of up to £40,000 – meaning the net cost for a 40% tax payer is just £24,000 - those who have already maximised their current year allowance can also mop up any unutilised allowances for the three previous years, under “carry forward” rules.

Gary Smith, chartered financial planning at Tilney, looks at the benefits of carrying forward:

“Unlike ISAs which are an annual ‘use it or lose it’ allowance, under the current rules, savers can ‘carry forward’ any unused pension allowances from the previous three tax years once they have first fully used the current year allowance. Allowances from the oldest year are used up first and at the end of every tax year, the ‘oldest year’ falls away. Therefore, any allowances not used from the oldest year – now 2017/18 - will be lost for good if they are not carried forward.

“There are a couple of extra things to note when thinking about carrying forward. Firstly, to get tax relief on pension contributions that you make yourself, you need to ensure that the payments made in any tax year do not exceed earnings in that year. An employer is not restricted by an individual’s earnings so they are able to pay in higher sums on occasion.

“The ability to carry forward can be extremely useful for those looking to catch up on pension contributions because they are underfunded or because their financial position has improved and they are now in a position to do so. It is particularly useful for those whose current year pension contributions are now restricted by the tapered allowance because they have a total income over £240,000. For anyone in this position, which can see their current year allowance drop to as low as £4,000 if they are in receipt of £312,000 or more then the opportunity to mop up unused allowances from previous year is one that should be seriously considered, especially if their earnings in those years were below the threshold for the tapered allowance.

“Carry forward has further benefits beyond retirement planning as maximising a pension can potentially remove funds from your estate for inheritance tax purposes and gives options to pass on wealth to your heirs in a very tax efficient way.

“However there are also potential pitfalls. With the pension lifetime allowance now set at £1,073,100 for the next few years, care needs to be taken to ensure that contributions and growth in your investments won’t take you over this limit, as you will be liable for a tax charge on the excess when benefits are taken.

“With higher rate pension tax reliefs increasingly looking like they are living on borrowed time, it has never been more important to ensure you are taking full advantage of every allowance available to you. The ability to carry forward your pension allowances provides a great opportunity to reduce your tax bill and save for retirement. As always, make sure you seek advice from your financial planner.”

To read more about carry forward and how it can affect you, please see our guide here: https://www.tilney.co.uk/guides/pension-carry-forward