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

clock • 3 min read

Clare Moffat leads the pensions 'wing' of Prudential's Technical team. Clare looks at clients who want to make large contributions and how it's important that they are always scooping up Annual Allowance from the earliest years possible.

 

"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.

The case study

Maisie, a business owner, has the following total Pension Input Amounts in each of the following tax years:

2014/15 - £20,000, 2015/16 pre-alignment £20,000, 2015/16, post alignment £35,000, 2016/17 and 2017/18 - £0.

What can Maisie contribute in the 2017/18 tax year without incurring an Annual Allowance charge but using up her 2014/15 carry forward? The tapered Annual Allowance does not apply to Maisie.

Year

2014/15

2015/16 pre

2015/16 post

2016/17

2017/18

Annual Allowance (AA)

£40,000

£80,000

£0
(+ unused AA from
pre-alignment limited
to £40,000, therefore
in this example £40,000)

£40,000

£40,000

 

Inputs

£20,000

£20,000

£35,000

£0

£0

Unused in 2017/18

£20,000

 

£5,000

£40,000

£40,000

 

Maisie can therefore make a contribution of £105,000 in the 2017/18 tax year without being subject to the Annual Allowance charge, with a further £40,000 possible on entering the new 2018/19 tax year, making a total of £145,000.

However, if she leaves further contributions until the 2018/19 tax year the 2014/15 falls out of the equation and means that she has £20,000 less to pay into her pension, £125,000 instead of £145,000.

Year

2014/15

2015/16 pre

2015/16 post

2016/17

2017/18

2018/19

Annual Allowance

£40,000

£80,000
(Limited to £40,000 for carry forward)

£0
(+ unused AA from pre-alignment limited to £40,000, therefore in this example £40,000)

£40,000

£40,000

£40,000

Inputs

£20,000

£20,000
(£40,000 limited for carry forward less post alignment input of £35,000)

£35,000

£0

£0

£0

Unused in 2018/19

Nil

£5,000

£0

£40,000

£40,000

£40,000


Conclusion

If you have clients who want to make large contributions then it is important that they are always scooping up Annual Allowance from the earliest years possible. Making a contribution in March rather than May could mean a significant amount extra for their future. It is important that they understand how important the planning is.

For more around tax planning at tax year end, take a look at our tax year end hub.

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