Explained: Pension Carry Forward

Effective pension planning involves an understanding on your pension annual allowance, and making the most of its intricacies, so you can build wealth for the retirement you desire.

One part of your pension plan to consider, and worth enlisting the help of a financial adviser for, is pension carry forward.

In this article, we’ll guide you through what is pension carry forward, and how you can use this method as part of your financial plan.

What is pension carry forward?

Pension carry forward allows you to make contributions above the annual allowance, and still receive tax relief.

The pension annual allowance is the amount you can contribute to your pension pot each year before you have to pay tax. As of the tax year 2021/2022, this stands at £40,000 — or 100% of your income, if you earn less than £40,000.

However, pension carry forward allows you to contribute more than this threshold, by carrying forward any unused annual allowances from the previous three tax years.

You can find plenty of resources online to help you understand more about pension carry forward and how to integrate it into your retirement plan, such as at: www.closebrothersam.com/financial-planning/, for example.

Remember, the value of investments can go down as well as up and you may get back less than you invested. This article is not intended to be an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation.

Any tax benefits will depend on your personal tax position and rules are subject to change. You cannot carry forward unused allowances from any tax year where you were not a member of at least one qualifying, UK registered pension scheme.

If you want to work this out for yourself, you can use the gov.uk online calculate to check if you have unused annual allowance. You can use the calculator to identify if:

• Your pension savings are more than your annual allowance
• You have any unused annual allowance to carry forward

It’s also best to ask each of your pension providers for the details of your pension savings.

On the other hand, if you consult with a financial adviser, you can lean on their expertise to help you navigate the complexities of retirement planning.

How does pension carry forward work?

In order to make the most of pension carry forward, you need to have contributed the maximum amount to your pot, for the current tax year. From tax years 2018/2019 to 2021/2022, the annual allowance remained at £40,000 each year.

The amount of annual allowance you can then carry forward is dependent on how much you used in the previous three tax years. You need to take into consideration any contributions from your employer, the tax relief you received from HMRC, and the total value of the contributions you made to your pension.

What are the conditions of using pension carry forward?

There are some requirements you need to adhere to in order to take advantage of this method.

You must have:

• A UK registered pension scheme in each of the tax years you wish to carry forward from (as previously mentioned). This does not include the State Pension, and you only need to be a member — not necessarily paid any money in
• Earnt at least the same amount you are looking to contribute to your pension, in the current tax year. For example, if you’re looking to place £60,000 in your pension using carry forward, your income must be at least £60,000

The benefits of pension carry forward

Using this method as part of your retirement and financial planning, is particularly effective for those who have an irregular income from year to year. If you’re self-employed for example, and you have a successful year, earning a higher income than the year before, you can use pension carry forward to help contribute more to your pension.

On the other hand, if you are a high earner impacted by a tapered annual allowance, you could potentially use pension carry forward to contribute above the adjust threshold.

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Pension carry forward can be an effective tool to boost your pension contributions, but to ensure you are making the most of these rules, it’s best to consult with a financial adviser to formulate the best retirement plan for your needs.

The value of investments can go down as well as up and you may get back less than you invested. This article is not intended to be an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Any tax benefits will depend on your personal tax position and rules are subject to change.