Understanding carry forward

Cottage_Economy

Hoping someone can clarify a couple of things for me regarding carry forward of pension contributions.

Apologies if this is a little long. I am trying to find my way through a subject I’m not that familiar with and understand the three different RM pension types DH has.

DH is 58 and planning to retire at 62. He has 13 years FS and 11 years CSDB and had paid into the CDC since April 2018 (6% contributions). He is planning to use his SIPP to supplement his income between 62 and 65 and leave his RM pension in place. I am 12 years younger than him so will still be working and accumulating my pension. We are both basic rate tax payers.

In preparation, we want to start putting some lump sums from our S+S ISAs (~ £40k) into DH’s SIPP to get the additional boost from tax relief and want to do it as quickly as possible. This will probably involve using the rules of carry forward, something we have never done.


1) How exactly do we do carry forward?! We've never done it before and don't know the exact process. Do we just put the lump sum into his SIPP (allowing for tax relief) and that’s it? Do we have to notify any specific organisation or fill a form in?

2) We’re going to write to the RM pensions department and ask it for DH's total contributions over the last three years but want to work out some rough figures in the meantime, as the pensions dept is often painfully slow.

We know we have to work out what the total contributions were from all sources for each year (RM pension + SIPP including tax relief), and subtract that from his salary. His pensionable pay is just over £19k, but he actually earns closer to £24k once extras/overtime are added on. Which of these two figures should we be using for the calculation?


3) DH can take his NRA60 benefits at 60 and carry on working, leaving his NRA65 benefits to build up. Is it worth it though, given the restriction on pension contributions he will then have? We do have a number of assets we could sell to release cash in the run up to his retirement at 62 and stuff in the SIPP if needs be to give it a boost but have no fixed plans to do so yet.

4) Have I missed/misunderstood anything?

BoGoF

You seem to be overcomplicating things.

First of all, no idea what all those acronyms are.

Secondly, his total earnings this year from all sources are around £24k.......is that correct?

You do realise the maximum he can get tax relief on is the amount of earnings in the year. Carry forward only comes into play when your earnings exceed £40k

Cottage_Economy

RM = Royal Mail
DB = Defined Benefit
CSDB = Career Salary Defined Benefit
CDC - Collective Defined Benefit
S+S = Stocks and Shares
NRA = Normal Retirement Age

That's not what I understood.

I thought you could contribute up to your salary each year (to a maximum of £40,000 a year) and then use your unused allowances from previous years as soon as you have maxed out the current year.

Haven't seen anything that says you have to earn £40k or more?

Cottage_Economy

Ok, I'm getting confused. Let me start again.

We have £40k in stocks and shares ISAs. We want to get it into the SIPP as soon as practically possible.

DH earns £24k a year.

How can he do it?

I thought maxing out his pension contribution allowance this year and then using carry forward but I seem to be wrong on that?

NoMore

You can only use carry forward when you've used up your full current contribution limit i.e. 40k, therefore you need to be earning at least 40k (in order to contribute that much) before you can use carryforward.

As your partner earns 24k, they cannot take advantage of carryforward.

Cottage_Economy

Thanks guys

I have to say, everything I've read to date has talked about allowances and maximums but nothing has clearly stated, as you both have, you need to be earning £40k before being able to take advantage of carry forward.

So back to the drawing board. It seems the way to get the money into the SIPP as quickly as possible would be to estimate my husband's likely contributions this year and contribute up to his £24k earnings. Then do this each year until the money is all across.

So this year, roughly £24,000 - £5700 (DH 6% contribution + RM's 13.6% contribution + our additional SIPP contributions) = £18,300 contribution maximum. Probably do less than this, maybe £16,000, to be on the safe side in case my sums are wrong.

So we could do it in three years.

Paul_Herring

DH earns £24k a year.

How can he do it?

As you've figured out, by contributing, gross, £24K per year into a pension - that is the maximum he is allowed.

If contributing out of after-tax pay, that's (£24K×80%) £19.2K pa (which gets grossed up to that £24K - yes, technically this includes the personal allowance which didn't get taxed to begin with - think of it as an extra bonus.)

Remembering to subtract any existing contributions made this tax year, before working out how much extra contributions to make for this tax year.

Given your £18.3K figure (i.e. presuming the £5.7K to be accurate,) that's (×80%) £14.6K (+change)

Dazed_and_confused

Where is your husband resident for tax purposes?

Paul_Herring

Something not yet mentioned btw - are you fully contributing to your own pension in the same manner? Even if you're not earning - if you are, apply the same calculations above - you can still contribute £3.6K gross to a pension (£2.88K net.)

Cottage_Economy

Dazed_and_confused wrote: »

Where is your husband resident for tax purposes?

The UK.

Paul_Herring wrote: »

Something not yet mentioned btw - are you fully contributing to your own pension in the same manner? Even if you're not earning - if you are, apply the same calculations above - you can still contribute £3.6K gross to a pension (£2.88K net.)

I am contributing to my work pension (11% + 5% from employer, salary sacrifice), but we're adding extra to DH's as he is already at the age where he is able to access his SIPP if things go pear-shaped, whereas being 12 years younger if I add extra to mine it will be many years before I can get hold of it.

Cottage_Economy

Paul_Herring wrote: »

Given your £18.3K figure (i.e. presuming the £5.7K to be accurate,) that's (×80%) £14.6K (+change)

Just realised it isn't quite accurate. I put £800 into it in March, but that was last tax year.