One such opportunity is about to shrink for those able to make an additional contribution to their pension pot. From 6 April, the start of the new tax year, the amount that can be paid into a pension using “carry forward” will fall. Here’s why.
A less generous “annual allowance”
We each have an annual allowance that determines how much we can contribute to a pension. Contributions of individuals and their employer, and any boost these get from tax relief, count against the allowance.
Carry forward allows you to use unused annual allowance from previous years to make extra contributions from time to time. There are rules to follow, one being that an individual may not make a contribution using carry forward that exceeds their annual earnings.
You can take unused allowance from the three preceding years and add it to your allowance for the current year. So, for 2016/17 you can take unused allowance from 2013/14 onwards.
Importantly, the annual allowance in 2013/14 was £50,000 but it dropped to £40,000 after that.
A special arrangement existed in the 2015/16 tax year that meant a higher annual allowance was in place - potentially as high as £80,000 - as a transitional measure. There’s more detail in our carry forward guide.
As a result of the annual allowance falling after 2013/14, those able to use carry forward will have £10,000 less of allowance next year than this - because 2013/14 will have fallen out of the allowed three-year period.
A squeeze on high earners
Making a large one-off pension contribution using carry forward isn’t only for high earners. There’s no doubt, however, that it is the wealthy that have the greatest capacity to use carry forward.
Unfortunately, this group also face further limitations on how much they are able to pay into a pension with tax relief. Their annual allowance falls the more they earn - this is known as the “tapered annual allowance”.
Your annual allowance could be reduced if your “adjusted” income is more than £150,000 a year and your “threshold” income is more than £110,000 a year.
There are specific rules on exactly what’s included in each figures. In broad terms, threshold income includes your income from all sources minus pension contributions you’ve made, while adjusted income is all your taxable income plus including pension contributions from both you and your employer. You can read more on exactly how these figures are calculated in our guide.
For every £2 that your adjusted income exceeds £150,000, your annual allowance reduces by £1.
The maximum reduction to the annual allowance is £30,000, which means it reduces to £10,000 when your adjusted income hits £210,000.
This significantly reduces the capacity for pension saving of this group - making the boost of an extra £10,000 of carried forward annual allowance even more attractive.
Establishing the figures for this calculation can be complicated - particularly where defined benefit contributions are involved - and you may wish to call upon the services of a financial adviser. Fidelity also has a guide to get you started.
Ed joined Fidelity in 2016 following a 13-year career in newspaper journalism, most recently as investment editor at The Daily Telegraph. He was previously news editor and personal finance editor for Thisismoney.co.uk, the money channel for Mail Online and has contributed articles to the Daily Mail.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Eligibility to invest into a pension and the value of tax savings depends on personal circumstances and all tax rules may change. You cannot access your pension till aged 55. Pensions can be a complex area. If you are unsure we strongly recommend that you obtain financial advice to help you decide what action you need to take if any. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.