Most people can tax-efficiently contribute up to £40,000 – the annual allowance – to their pension each tax year as long as they earn this much or have an employer willing to contribute towards their pension. It may be possible to contribute more than this though by ‘carrying forward’ unused annual allowances from the three previous years.
How does pension carry forward work?
A tax charge normally becomes due if a client’s pension contributions exceed the annual allowance. Pension carry forward, where available, allows them to make pension contributions in excess of the annual allowance while still receiving tax relief.
To qualify, the client must have used up their annual allowance in the current tax year and have contributed less than their annual allowance in any of the previous three tax years. For example, if they only contributed £30,000 in the last tax year, then £10,000 in unused allowance can potentially be carried forward to the current tax year. A condition is the client must earn at least the amount they wish to contribute in the year they are making the investment, unless the contributions are funded by the employer. Certain other conditions apply too.
When utilising an unused allowance, the earliest of the three carry forward years should be used first.
How does pension carry forward work with the tapered annual allowance?
Carry forward can still be used where the tapered annual allowance applies. The client needs to measure any unused annual allowance against their tapered allowance for each given year. For example, if for a particular year the annual allowance was tapered down to £30,000 and they contributed £25,000, there would be £5,000 annual allowance available to be carried forward to a future year.
How does pension carry forward work with the money purchase annual allowance?
If a client is already flexibly accessing their pension and is subject to the money purchase annual allowance (MPAA), they will not be able to take advantage of carry forward for any contributions to a money purchase pension. This applies from the date in the tax year they first trigger the MPAA and to every subsequent tax year. However, if they are a member of a defined benefit pension scheme, they may still be able to utilise any available carry forward against contributions to that arrangement.
Carry forward | Pension training video
This is a technical training video to help prepare for the CII examination but can help with all the core learnings surrounding carry forward.
The content contained on this page is designed to give professional financial advisers technical information on retirement planning and pensions legislation and should not be relied upon.
No statements or representations made in any of the content provided on this page are legally binding on Fidelity or the recipient and no liability is accepted in connection with this material or any matter discussed. FundsNetwork cannot give advice regarding tax.