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Home News The lesser-known secrets to getting a better pension: carry forward and lump sums

The lesser-known secrets to getting a better pension: carry forward and lump sums

by wrich
  • In most cases you can contribute up to £40,000 into your pension every year. If you go over this, you will need to pay tax.
  • If you are a high earner or have already accessed your pension, then you may have a lower annual allowance.
  • … but if you didn’t use your whole annual allowance in previous years, you can use a process called carry forward to pay in more than the annual allowance.
  • You can pay in unused tax allowances over the past three years.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown:

“If you’re locked into paying the same monthly sum into your pension, and haven’t thought about it for years, two simple tricks could transform your pension prospects.

 The first is to think about your contributions slightly differently. You may be able to boost what you pay in each month. Alternatively, there may be certain times of the year you can put a little extra aside.

You don’t have to stick to the pension minimums your employer sets up for you. You can contribute monthly, yearly – whenever you like. You can top up when you have a little extra money or at the end of the tax year. Most people have an annual allowance of £40,000 they can contribute to tax-efficiently, and it’s worth taking as much advantage of this as makes sense for your finances: in the last tax year 3,730 of our clients contributed exactly £40,000 to their pension.

One lesser-known trick is to use carry forward rules in order to pay more. If you have any unused annual allowance in the previous three tax years you can use this to pay in more than your annual allowance this year. This flexibility is particularly useful for self-employed people, who may have a lumpy income and may not feel they can commit to making regular monthly contributions. You can make several ad-hoc larger contributions when you have the funds available and if you find yourself in a position where you land a big job or get a windfall, you can use carry forward to turbo-charge your pension contribution.

This process is more popular than you might think. A quarter (25%) of HL clients made a one-off contribution to their pension in the last tax year while a further 29% made contributions on a less than monthly basis. Just over 11% contributed more than monthly.

While making use of annual allowances is an important way of boosting your pension it’s worth saying that not everyone is able to take advantage of the full £40,000 allowance. If you have already accessed your pension, then you will be limited to an annual allowance of just £4,000 per year.

Similarly, if you are a high earner and have an adjusted income of £240,000 and a threshold income of £200,000, then you will be subject to what is known as the tapered annual allowance. For every £2 you earn over this your annual allowance will be reduced by £1. The minimum reduced annual allowance you can have is £4,000.

If you exceed the annual allowance then this should be included on your self-assessment tax return. The amount by which you have exceeded it by will be added to the rest of your taxable income for the tax year and be subject to income tax.”