Quantcast

Can I use last year's unused pension allowance to top up my savings this year?

pension carry forward.jpg

The silver pound without the grey areas

  • Save up to £40,000 each year into your pension(s), but no more than your annual income
  • Save up to £1,030,000 in total over your lifetime – any more and you’ll pay tax
  • Get a free £20 top-up for every £80 you save
  • Claim an extra £20 top-up if you’re a higher rate taxpayer
  • Only access your money once you’re over 55

And now for the little-known pension hack:

  • Carry forward your unused annual allowance from the previous three tax years to save more than £40,000 a year

 

Do I qualify to carry forward my pension allowance?

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.

 

Here’s an example of how it works

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.

 

A couple more bits to consider

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

 

Let a calculator work it out for you

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 like the Carry Forward and Annual Allowance Calculator by Hargreaves Lansdown, and also the Retirement Income Options Tool by Money Advice Service.

 

We hope this helped to clear up some of your questions about your pension annual allowance. Here’s to a happy retirement!

Read our retirement guide for more tips and tricks

What's next?

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

Want to know more?

limbo stocks.jpg

Holly's top picks: hottest stocks and shares ISAs 2019

Cash ISA interest rates are lower than limbo. To really put your savings to work, it might be time to consider a stocks and shares ISA. Holly picks her favourites for beginners and pros.

Hottest stocks and shares ISAs 2019

spyro millennial pension.jpg

Millennials, your pension craves attention! Here's how to get started

You're probably tired of hearing how screwed millennial finances are. We already know – we live it every day! So this time, how about some practical advice instead? Let's talk pensions.

Millennials, your pension craves attention! Here's how to get started

Learn the Tribal Way

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

Related Questions

Got a Question?