Industry Voice: I’ll think about my pension next year

“I’ll think about my pension next year”. It isn’t unusual for clients to make this statement. Often they think they can leave it until they have more money, have paid off the mortgage, built up the business and so on. That strategy used to work. However, the reduction in Annual Allowance (AA), removal of year of vesting exemption and the potential for the tapered Annual Allowance to apply at some point makes it harder to build up the same size of funds as before. Making sure allowances are used could be crucial.

Carry forward – how does it work?

As unused Annual Allowance can only be carried forward from the three previous tax years and only after the current Annual Allowance has been fully used. However, what is sometimes forgotten is that you have to have been a member of a UK registered pension scheme for any year you are carrying forward from.

Making use of prior year’s unused allowance requires that the current year’s allowance is used first. This means carry forward is only appropriate for clients with relevant income over their 2017/18 Annual Allowance (unless the contribution is made by an employer, as employer contributions are not limited by the individual’s relevant income). You then go back to the furthest away tax year, in this case 2014/15 for any excess that is using carry forward.

Planning around using carry forward

To ensure that unused allowance from 2014/15 can be used up this year using carry forward first identify unused allowance from pension input periods ending in 2014/15. Second, make a sufficiently large pension contribution so total inputs are at least the unused allowance amount plus the relevant Annual Allowance for the 2017/18 tax year.

It should always be remembered that if the contribution is to be made as a personal contribution (that is, not an employer contribution) the pension member will need to have sufficient ‘relevant income’ to support any level of pension contribution.