Pension Carry Forward: What You Need to Know
Pension Carry Forward: What You Need to Know
Pension carry-forward is a feature of the pension system that allows individuals to carry forward any unused annual allowance from the previous three tax years. This can be useful for individuals who have not fully utilised their annual pension contribution limits, as it allows them to make larger contributions in future years.
The annual allowance for pension contributions is currently £40,000 per year, but this limit can be reduced for individuals with high levels of income. For those with adjusted income of over £240,000, the annual allowance is reduced by £1 for every £2 of income above this threshold, down to a minimum of £4,000.
Carry-forward allows individuals to make up for any unused annual allowance from the previous three tax years. For example, if an individual contributed £30,000 to their pension in the current tax year, they would have £10,000 of unused allowance that they could carry forward and use in the next tax year.
To make use of carry-forward, individuals must have been a member of a pension scheme during the tax year in question and must have made contributions to the scheme. It is also important to note that the unused annual allowance from the earliest tax year is used first.
Carry-forward can be particularly useful for individuals who have had a year with lower income, as it allows them to make larger contributions to their pension in future years when their income is higher. It can also be useful for those who have recently started saving for their retirement and want to catch up on missed opportunities to contribute.
It is important to note that there are limits to how much can be carried forward. The maximum amount that can be carried forward is the lesser of the unused annual allowance from the previous three tax years or the current year’s annual allowance.
In addition, it’s also worth noting that there is a Lifetime Allowance (LTA) which is currently at £1,073,100 for the tax year 22/23 and will remain frozen at the level until 25/26. This limit applies to the total value of all pension benefits an individual can accumulate during their lifetime without incurring additional taxes. So, individuals should be careful when making use of carry-forward to avoid exceeding the lifetime allowance limit.
If you are looking to make use of carry-forward, individuals should inform their pension scheme administrator of their intention to do so and provide details of their unused annual allowance from the previous three tax years. The scheme administrator will then make the necessary adjustments to ensure that the correct amount of contributions is made.
Pension carry-forward is a valuable feature of the pension system that allows individuals to make up for any unused annual allowance from the previous three tax years. It can be particularly useful for those who have had a year with lower income, or for those who have recently started saving for their retirement and want to catch up on missed opportunities to contribute. However, it is important to be aware of the limits to how much can be carried forward and the lifetime allowance limit. Individuals should inform their pension scheme administrator of their intention to make use of carry-forward and provide details of their unused annual allowance from the previous three tax years.
Each month we’ll aim to bring a bit of humanity and common sense back into the world of finance.
