carry forward rules

dptp1

We are fast approaching the end of this tax year and I am concerned about eligibility for carry forward of pension contributions.

I stopped working, aged 65, in February 2015, therefore have earnings for this tax year. Next tax year I will have no earmed income.

Will I be able to make contributions next tax year for 2014/15 and pevious years?

A bit worried that I will have lost the opportunity for tax relief on possible substantial pension contributions.

TH1878

dptp1 wrote: »

We are fast approaching the end of this tax year and I am concerned about eligibility for carry forward of pension contributions.

I stopped working, aged 65, in February 2015, therefore have earnings for this tax year. Next tax year I will have no earmed income.

Will I be able to make contributions next tax year for 2014/15 and pevious years?

A bit worried that I will have lost the opportunity for tax relief on possible substantial pension contributions.

After April 2nd (by virtue of when the end of the tax year falls) you will only be able to contribute £3,600 without any relevant earnings.

jamesd

You are limited to getting tax relief on no more than your earned income in each tax year, or £3,600 gross is that is higher. You cannot carry forward income from past years.

There is also a cap of £40,000 that applies if this is lower than your earned income. Provided you were in any pension scheme, even if not paying in for decades, you can carry forward the unused portion of this allowance from the past three years. It was £50,000 at the start of that range.

So no, you cannot make contributions next tax year for previous years because you cannot carry forward earned income and have stopped working, so you have no earned income next tax year, just the basic £3,600 gross to use.

The best you can do is try to use your whole earned income in this tax year with the help of carry-forward of the annual contribution allowance if that was above £40,000.

kidmugsy

dptp1 wrote: »

We are fast approaching the end of this tax year and I am concerned about eligibility for carry forward of pension contributions.

I stopped working, aged 65, in February 2015, therefore have earnings for this tax year. Next tax year I will have no earmed income.
A bit worried that I will have lost the opportunity for tax relief on possible substantial pension contributions.

Make your maximum contribution for this tax year, and do it quickly. A member of my family made a contribution earlier this week just by phoning Hargreaves Lansdown: no doubt some of their competitors can also transact business promptly. You can leave the money as cash within the pension while you decide at leisure what to invest it in.

dptp1

Thanks for your kind replies.

Looks like I will have to get a move on and I will have to break a 42 day notice period on my cash ISA.

I am still a little concerned that I will be surrendering cash deposits for a small TFC cash amount of £7500 (per annum?) and a taxed income.

I suppose there is no way round this though?

TH1878

dptp1 wrote: »

Thanks for your kind replies.

Looks like I will have to get a move on and I will have to break a 42 day notice period on my cash ISA.

I am still a little concerned that I will be surrendering cash deposits for a small TFC cash amount of £7500 (per annum?) and a taxed income.

I suppose there is no way round this though?

If you have no other income, you can structure the income payments so you don't pay tax. Even at 20% tax, it will work in your favour as you get tax relief on the contributions.

kidmugsy

dptp1 wrote: »

I am still a little concerned that I will be surrendering cash deposits for a small TFC cash amount of £7500 (per annum?) and a taxed income.

(i) if you crystallise the lot in one go you get 25% tax-free, not 25% p.a. If you phase in the crystallisation, you get 25% tax-free on each occasion.

(ii) You have no earnings. Do you have any other pension income beyond your State Retirement Pension?

jamesd

The tax gain on £7,500 if you get basic rate relief on the way in is worth £1,500. That's probably worth a penalty on the ISA.

You get up to 25% tax free lump sum once for each portion of the pension pot as you take benefits from it (crystallise it). You can do that all at once or in as many pieces as you like. Because it is tracked whether you've taken the 25% you can't do it more than once for each portion of a pot.

dptp1

kidmugsy wrote: »

(i) if you crystallise the lot in one go you get 25% tax-free, not 25% p.a. If you phase in the crystallisation, you get 25% tax-free on each occasion.

(ii) You have no earnings. Do you have any other pension income beyond your State Retirement Pension?

I thought the max. TFC would be £7500 because of the recycling rules, allowable after 1 year and one day between payments?

At the moment my only taxable income in 2015/16 would be the state pension which would be covered by the personal allowance.

dptp1

jamesd wrote: »

The tax gain on £7,500 if you get basic rate relief on the way in is worth £1,500. That's probably worth a penalty on the ISA.

You get up to 25% tax free lump sum once for each portion of the pension pot as you take benefits from it (crystallise it). You can do that all at once or in as many pieces as you like. Because it is tracked whether you've taken the 25% you can't do it more than once for each portion of a pot.

I did not realise I could phase payments from the pension pot in this way. Does this need to be set up from the outset?

This could also answer another question I had re. TFC withdrawals. At the moment the pension pot value is approx £125k with no contributions for many years. I understood that 25% of this could be withdrawn tax free, £31,250. However, if I now make additional contributions this tax year of £40k gross, giving total pension value of £165k, the max TFC from 2015/16 would be £7,500 because of the recycing rules. This can't be correct can it.

Sorry for the confusion.

kidmugsy

dptp1 wrote: »

This could also answer another question I had re. TFC withdrawals. At the moment the pension pot value is approx £125k with no contributions for many years. I understood that 25% of this could be withdrawn tax free, £31,250. However, if I now make additional contributions this tax year of £40k gross, giving total pension value of £165k, the max TFC from 2015/16 would be £7,500 because of the recycing rules. This can't be correct can it.
.

(i) Bunging in a non-routine large contribution in 14-15 will restrict the rate at which you can efficiently withdraw your TFLSs. If you hurry up, you can take £12,500 in 14-15 without complication. You would typically do that by crystallising £50,000 of your pension, leaving the rest uncrystallised.

(ii) Then a year and a day later another £7500 TFLS, and so on until all your TFLS is withdrawn.

(iii) At the beginning of 15-16 you'd find yourself with £37500 of crystallised cash that you could withdraw tax-exposed. A good wheeze would be to withdraw enough to live on while deferring drawing your State Retirement Pension. That's assuming that your reasonably expected lifespan is good. Then eventually when you draw your state pension you get an extra pension of 10.4% for each year of deferral.

(iv) Or withdraw more than you need and bung the excess into some attractive investment e.g. ISAs, high interest current accounts, high interest regular saver accounts, 65+ bonds.

(v) When, late in 15-16 you take your £7500 TFLS, you gain another £22,500 waiting to be withdrawn as tax-exposed income.

(vi) When all your TFLS has been taken, you may well have tax-exposed money left in the pension plus lots invested outside the pension, plus a bigger state pension.