How much could I carry forward and should I?

vikkiew

Hello, here are the details:

2013-14: 14k annual allowance used (company defined benefit pension)

2014-15: 15k (DB)

2015-16: 19k (DB) + 14k (SIPP started, gross contribution includes 20% top up)

2016-17: estimate 16k (DB) + 15k (SIPP)

Salary 60k.

I have unused allowance, but whatever the amount is I can not use this to increase the DB pension with my employer, only the SIPP. I only started the SIPP in 2015-16 and if I have understood correctly I can then not use 2014-15 unused allowance to top it up because the SIPP didn't exist back then?

I understand additional tax relief only applies for the current tax year, so for example I can not contribute now and claim back tax relief I could have had in 2014-15. Is there any way to get historical tax relief?

What is the maximum I could further contribute to my SIPP this year to maximise any unused allowance without any tax penalty?

Thank you

HappyHarry

As you have had a pension scheme in place for the the past three years (the DB scheme), you can use carry forward. It does not matter if the scheme you add extra contributions to has been in place for the past three years, simply that you have had a scheme in place.

From your details, the maximum you could contribute this year would be your earnings i.e. 60k gross. If you have already contributed £31k, then you could contribute another £29k this tax year.

Three points worth noting:
(i) The 2015/16 tax year was a special year as far as the annual allowance goes. The year was split into two periods, one with a £80,000 annual allowance (maximum carry forward of £40,000) and one with a £0 annual allowance.
(ii) The annual allowance used by your DB scheme is a calculation based on increase in value of your pension, it is not based on contributions made to it.
(iii) When using carry forward, you will use the unused 2013/14 annual allowance first. This means that next tax year you will be able to use carry forward again, this time using the 2014/15 unused annual allowance first.

jamesd

There is no way to get pension tax relief on income in past tax years.

It is possible to go one year back with EIS and SEIS relief. Not VCT relief though.

vikkiew

Cheers. In that case, without possibility of tax relief on previous years my option would be to contribute up to about 44k in my SIPP. Unlike the 15k so far which has benefited from 40% relief any further would only get 20%. What is the typical recommendation in this situation? I am in my early thirties, I like the 40% relief but I'm not sure 20% is such a great deal considering I won't have access for decades.

bigadaj

I'd be tempted to use isas instead if you don't use them already.

Extra flexibility should you need access and income is tax free whereas pension income is taxed.

Might also allow or contribute to early retirement in the future as it could be 60 before you are able to access pensions.

vikkiew

I am currently in the fortunate position of having already done that. I am maxing my ISA and contributing the 15k or so of my income in the higher rate for 40% tax relief. My dilemma is whether it is worth it to add a little more into my SIPP given it will be locked away for another 30 years, which is both a good and bad thing. Would most stop or continue into the 20% relief?

MoneyLover_2

You should think about whether the value of your benefits might exceed the Lifetime Allowance in the future.

Triumph13

If you keep working for another 30 years you are on course to go way over the Lifetime Allowance (if it still exists) and also to be a higher rate taxpayer in retirement. If that happens then you would make a 44% LOSS on any SIPP contributions that only had 20% tax relief as your £80 net contribution gets grossed up to £100, but then taxed at 55%.
In your position I'd be looking to invest the extra outside of a pension wrapper. VCTs would be well worth looking into.

jamesd

Look into VCTs. HMRC refunds 30% of the purchase price, repayable if you sell within five years and capped at your actual income tax paid. £20k a year would eliminate most of your basic rate income tax liability. After five years you can sell and recycle for another 30%. VCT dividends are tax exempt and there is no CGT either. A wide range of different risk levels available.

vikkiew

Interesting and enlightening answers.

Considering numerous factors and assuming the LTA stays around 1 million my DB scheme should reach LTA when I am 55-60.

My strategy with SIPP has been to put any unused annual allowance that is in the higher rate for 40% tax relief. Assuming the annual allowance remains around 40k I am likely to contribute around 150k in the next 20 years by which time the DB alone should be at the annual allowance so even before investment gains that is another 15% of LTA.

So, while difficult to predict things in this crazy world my projections indicate reaching LTA.

I will look into VCTs.

vikkiew

I have looked into VCTs. For a start, the charges put me off. Generally poor reviews advising against also due to performance and limited control. I am happy to take risks and commit long term but VCTs just don't look good.