Pension Carry Forward

YorkshireBoy

Hi all, looking for some collective wisdom/knowledge please.

Despite reading several threads on this subject I'm still unclear on the 'rules' of pension carry forward.

I'm currently making plans to take early retirement late next year aged 61, and think I want to (should?) maximise pension contributions in the current tax year.

2019/20 - on employment earnings of c. £51,000 I made pension contributions of c. £11,000 (5% mine, relief at source*, 5% employer, and a one-off £5K payment just before the end of the tax year [which was then grossed up to £6,250]).

2020/21 - based on projected employment earnings of £53,000 (£48,000 salary and £5,000 bonus, but no pension payment made from bonus) am I right in thinking I can carry forward £13,000 from the 2019/20 tax year and therefore make gross contributions totalling £53,000 in the current tax year?

So if my pension sees £5,400 (total of mine, relief at source, and employer) I can contribute a further £47,600 gross, ie a net payment of £38,080 made by me before tax year end?

* Employer deducts after tax and pension provider adds 25% uplift from HMRC. I think this is called relief at source?

HappyHarry

Yes, you are correct.

Using carry forward, your pension can receive contributions of £53,000 this year.

If there have already been/will be contributions totalling £5,400, then additional contributions totalling £47,600 can still be made.

You could therefore make a net personal contribution of £38,080.

hugheskevi

Note that you can contribute up to 100% of earnings and receive tax relief. Employer contributions do not count toward this limit, so you could contribute £53,000 in addition to whatever your employer contributes.

YorkshireBoy

hugheskevi said:

Note that you can contribute up to 100% of earnings and receive tax relief. Employer contributions do not count toward this limit, so you could contribute £53,000 in addition to whatever your employer contributes.

I told you it wasn't clear to me.

So just to confirm that I could make a one-off payment of £42,400 which when grossed up would be £53,000, ie a 'free' £10,600.
Is that correct?

A supplementary question...I'd probably have to fund some of this one-off payment by withdrawing from my S&S ISA, so as not to deplete my cash balance too much. A good move or a bad move?

hugheskevi

YorkshireBoy said:

So just to confirm that I could make a one-off payment of £42,400 which when grossed up would be £53,000, ie a 'free' £10,600.
Is that correct?

Nearly - but remember to deduct the regular contributions (including tax relief) that you have already made (your own contributions, not employer).

A supplementary question...I'd probably have to fund some of this one-off payment by withdrawing from my S&S ISA, so as not to deplete my cash balance too much. A good move or a bad move?

Not especially harmful - you can invest in the same assets in ISA or pension usually, so it is just transaction fees you lose.

However, you can access the pension immediately due to your age, so there isn't much harm in depleting a cash balance which presumably isn't returning much by way of interest. If money is needed, it can be taken from the pension (or SSISA). 

YorkshireBoy

hugheskevi said:

Nearly - but remember to deduct the regular contributions (including tax relief) that you have already made (your own contributions, not employer).

Thanks again.
With the numbers above, and excluding employer contributions, I'd have paid in (£200 x 12) x 1.25 = £3,000 this tax year
So I'd deduct £3,000 from the £53,000 (which is this year's £40,000 plus £13,000 carried forward from last year) leaving £50,000.
I could then pay in £40,000 net, which would be grossed up to the £50,000.

Apologies, I'm just trying to get my head round it!

zagfles

YorkshireBoy said:

hugheskevi said:

Nearly - but remember to deduct the regular contributions (including tax relief) that you have already made (your own contributions, not employer).

Thanks again.
With the numbers above, and excluding employer contributions, I'd have paid in (£200 x 12) x 1.25 = £3,000 this tax year
So I'd deduct £3,000 from the £53,000 (which is this year's £40,000 plus £13,000 carried forward from last year) leaving £50,000.
I could then pay in £40,000 net, which would be grossed up to the £50,000.

Apologies, I'm just trying to get my head round it!

The above is basically right except the bolded bit to be pedantic (and to help you understand if eg you want to repeat in future years). The annual allowance includes employer contributions - so you'll need more than £13,000 carried fowards, you'll need £13,000 plus employer contributions so about £15650 if employer conts are 5%. But it looks like you'll have easily enough available so not an issue this year, but could become one in future years.

The limit which you are constrained by here is NOT the annual allowance, it's the tax relief limit on personal contributions which is a separate limit nothing to do with the annual allowance. Your gross personal contributions are limited to 100% of earnings (or £3600 if more). Employer contributions don't count for this, just personal contributions to your employer's scheme and/or to a personal scheme (grossed up if RAS), and there is no carry forwards.

It confuses a lot of people because there is loads of simplistic rubbish out there which tries to combine the two unrelated limits. Even IFAs get it wrong.

YorkshireBoy

Thanks zagfles, but the £40K net contribution I can make this tax year is accurate based on figures given, yes?
I don't understand how it could be an issue going forward? My employment earnings in 20/21 up to retirement date will be circa £28,000, of which I'll contribute £1,400 and get £350 relief at source so £1,750 (employer will also contribute £1,400 making £3,150 in total). So I could make a one-off payment next year of (£28,000 - £1,750 = ) £26,250 gross, ie £21,000 net.

Am I getting it?

zagfles

YorkshireBoy said:

Thanks zagfles, but the £40K net contribution I can make this tax year is accurate based on figures given, yes?
I don't understand how it could be an issue going forward? My employment earnings in 20/21 up to retirement date will be circa £28,000, of which I'll contribute £1,400 and get £350 relief at source so £1,750 (employer will also contribute £1,400 making £3,150 in total). So I could make a one-off payment next year of (£28,000 - £1,750 = ) £26,250 gross, ie £21,000 net.

Am I getting it?

Yes, spot on. What I meant going forwards was if eg you decided to carry on working/got another job on around £53k and did the same for the next few years, then you'd end up exceeding the annual allowance. Without any carry forwards available, you'd be restricted to £40k minus total gross pension conts (inc employer).

But not an issue on your plans.

YorkshireBoy

zagfles said:

YorkshireBoy said:

Thanks zagfles, but the £40K net contribution I can make this tax year is accurate based on figures given, yes?
I don't understand how it could be an issue going forward? My employment earnings in 20/21 up to retirement date will be circa £28,000, of which I'll contribute £1,400 and get £350 relief at source so £1,750 (employer will also contribute £1,400 making £3,150 in total). So I could make a one-off payment next year of (£28,000 - £1,750 = ) £26,250 gross, ie £21,000 net.

Am I getting it?

Yes, spot on. What I meant going forwards was if eg you decided to carry on working/got another job on around £53k and did the same for the next few years, then you'd end up exceeding the annual allowance. Without any carry forwards available, you'd be restricted to £40k minus total gross pension conts (inc employer).

But not an issue on your plans.

Thanks again, I don't plan on going back to work!