And now for the little-known pension hack:
To take advantage of this handy pensions benefit – which is pretty much a ‘sorry’ gift from the government for reducing the annual allowance in 2014 – there are a few catches.
1. You still can’t save more than your annual income, so you need to be earning £40,000 + however much of your previous allowance you want to carry forward.
2. You need to have had a pension account open (i.e. not the state pension) in each of the years you wish to use the allowance from.
Imogen Fake is a middle manager earning £80,000 a year. For the past few years she’s been drip-feeding her pension with a monthly Direct Debit and not paying too much attention. But after watching a documentary about octogenarian office workers, she knew it was time to step up the retirement fund. Here are her workings…
Tax year 2015/16: Saved £12,000 of £40,000 allowance = £28,000 unused
Tax year 2016/17: Saved £16,000 of £40,000 allowance = £24,000 unused
Tax year 2017/18: Saved £40,000 of £40,000 allowance = £0 unused
Total for previous three tax years: £52,000 unused allowance
This tax year 2018/19: £40,000 allowance + £52,000 unused allowance = £92,000 potential allowance
However, as Imogen’s annual income is £80,000, she cannot use the full unused allowance of £92,000. She can only save £80,000, regardless of how much she can afford. But that’s still double what she’d have saved without carrying previous allowances forward, so we call that winning.
Tax relief counts towards your allowance
The £40,000 you can save each year is made up of your contributions as well as the government top-up and anything added by your employer.
So for a basic rate taxpayer wanting to save £40,000, you’d only have to contribute £32,000. The government tops up 20% to your 80%, so the extra £8,000 takes you to £40,000.
Your allowance shrinks when you earn more than £150,000
Although most people qualify for the £40,000 pension allowance, this only applies if your annual income is £150,000 or less. For every £2 you earn over this figure, your allowance is reduced by £1 down to a lower limit of £10,000. So…
£150,000 or less = £40,000 allowance
£180,000 = £25,000 allowance
£210,000 or more = £10,000 allowance
If you want to make use of the carry forward scheme, give your pension provider a call to sort it out. Before you do, though, it’s worth checking the numbers to see what you stand to save.
We hope this helped to clear up some of your questions about your pension annual allowance. Here’s to a happy retirement!
Join the thousands of people who get our weekly musings on money, great products, top tips and a dollop of opinion.Sign up to Holly's Blog
What have other people been doing? Learn from their experiences.
If you're more clued up about Peppa Pig than private pensions but can't find the time to decipher all the financial lingo, you could be a Tired Parent. Read our guide for quick and easy advice on life insurance, wills and nest eggs for the little ones.Tired Parents