Are you maximising the potential in your Pension? In the current 2023/24 tax year the annual allowance is the maximum that can be paid into your Pensions with the benefit of tax relief, for most people that amount will be £60,000.
Why does using your Pension allowance matter?
If you are able to fill this allowance as early in the tax year as possible, you’ll have more time invested towards potential growth – meaning you may hit your retirement goal earlier or with a larger Pension pot than originally anticipated.
What if you have already used up your Pension allowance?
Filling the allowance early may also mean you have a potential problem with what to do with your excess money. One option would be an ISA, where you benefit from an allowance of £20,000 in the 2023/24 tax year. If you’ve already filled that allowance too, the common step could be to look towards a General Investment Account, where there are no limits as to how much you can invest. It is worth noting however that despite the more flexible nature of a General Investment Account, they do not provide tax relief added to contributions like you would receive with Pension contributions.
Could you be more tax efficient?
However, there is a potential tax efficient solution you may not have been aware of. You can carry forward unused annual Pension allowances from the past three tax years. This could make a significant difference to your tax efficiency, allowing you to potentially invest into your Pension beyond just this year’s £60,000 allowance.
How carry forward works for you
Consider how much of the previous three years allowances you used. With the remaining allowance availability consider if you can use all of this now to invest into your Pension. When considering your past allowances, it applies across all Pension types, and you need to hold a UK Pension.
Carry forward can be especially useful for higher earners, or earners who will see their income vary widely in different tax years. It may be the case you couldn’t contribute as much last year to your Pension, but this year are able to contribute significantly above the allowance. Carry forward could be the ideal solution.
An example of Carry forward in action would be if you had invested your full £60,000 allowance in the current tax year. To use Carry forward you would need to look at the earliest tax year of the past three, it is the unused allowance from the earliest of the three tax years that is used first. Three years ago you used your full £40,000 allowance, and two years ago you used your full £40,000 allowance. But last year you had only invested £15,000 of your £40,000 allowance. That means that you can invest an additional £25,000 this year into your Pension through Carry forward.
|Tax year||Yearly earnings||Pension contribution||Annual Allowance||Unused allowance that year|
|Total unused allowance for Carry forward||£25,000|
If you are invested with True Potential you can easily check if you have any previous allowances remaining. Simply log in to your account, go to your Pension, click on Pension input period, and you’ll be able to see your total contributions for each tax year. This only applies to your True Potential Pension and only if you currently hold the Pension and have contributed to it in the past three years.
There’s a few things to keep in mind with Carry forward:
• You must have used all of your allowance from this year.
• You must use any unused allowance from the earliest tax year of the past three in the first instance.
• You must earn at least the amount you wish to contribute in the tax year you are making the contribution for.
What if you’ve withdrawn from your Pension?
If you have flexibly withdrawn from your Pension, you will be subject to a reduced annual allowance going forward called the Money Purchase Annual Allowance.
The Money Purchase Annual Allowance has recently been raised from £4,000 to £10,000 in the 2023/24 tax year. This is the amount you can put into your Pension once you’ve already flexibly accessed your pension.
It isn’t possible to use Carry forward to pay contributions to a defined contribution scheme above the Money Purchase Annual Allowance. When the Money Purchase Annual Allowance has been triggered, tax relievable contributions to defined contribution schemes are limited to £10,000. Contributions above that amount will attract an annual allowance charge. Carry forward may still be available for any defined benefit scheme funding.
Speak with a financial adviser
If you think you could be in a position to utilise Carry forward, it would be a good idea to speak with a financial adviser. They’ll be able to help you look at your previous allowances and apply the unused allowances to your current tax year. Every circumstance is unique to the individual, and when high sums of money are involved, it is always worth speaking with a financial adviser to ensure you are acting in the way that is most tax efficient and beneficial to your wealth. The potential for tax liability poses a risk, and a financial adviser will be able to assist you to ensure you are invested appropriately.
Do more with your money, consider if you could use Carry forward in your Pension today.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Pension eligibility and tax rules apply. Tax rules can change at any time. This blog is not personal financial advice. TPI Pension eligibility and tax rules apply. You should also ensure your contribution does not result in your total Pension contributions within the tax year exceeding £60,000.< Back to Blog