Can I top up my pension savings with last year's unused allowance?

By Mike Narouei, Content Producer at Boring Money

5 Mar, 2019

When you’re saving for retirement, it pays to put away as much as you can afford, as soon as you can. The longer your money sits in your pension – whether a private pension, workplace pension or SIPP (self-invested private pension) – the more time it has to grow. So is there a way to save more than the annual allowance, get a bigger tax relief bonus from the government, and give future you a more secure retirement? We’re glad you asked…

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