How to implement pension carry forward

NoMore

Let’s try a different tack, you can use carry forward however it would be a really really bad idea. 

Because everything you put in above your relevant income for this year would not be entitled to tax relief. Contributions without tax relief are bad as you will then have to pay tax on withdrawal. You’re much better off feeding the excess into isa or doing it over several years to put in pension keeping to the tax relief limit. 

That’s why people say you are limited to your earnings. 

Cobbler_tone

The best way that accessing unused allowances for us mere mortals is to get a hefty redundancy payment. Take the £30k and maximise any gaps, especially if you are of a certain age.

valuepack

Dazed_and_C0nfused said:

valuepack said:

Thanks everyone for your responses. 

I just want to give an example to illustrate what I want to do, and I'd really appreciate it if people could point out where I'm going wrong, if indeed I am. 

I earn about 35k.

I estimate that I'll receive about 100k inheritance.

Let's say during year 24-25, which is nearly over, I've paid 10k into my workplace pension, including employer contributions.

By the time I reach end of year I can have paid in a further 25k of my lump sum into my workplace pension. This would mean my pension contributions would equal my earnings.

Then, having maxed out my pension contributions for 24-25, I can use the carry forward rule and revisit year 23 -24. 

Let's say I earned 34k that year and paid in 9k in total pension contributions.

Using carry forward, I can then pay 25k of my lump sum into that year's pension contributions. 

Again, I've maxed out my pension contributions for that year but have not gone over my earnings amount.

Then, rinse and repeat for the two previous years.

This way, using the numbers in my example, I could pump my inheritance into my pension and get tax relief as I've not exceeded my annual earnings for any one year.

Is this not a good vehicle to get my inheritance invested?

You cannot ever "revisit" a previous tax year when it comes to pension contributions.

As you still haven't used all the 2024-25 annual allowance (£60k) I'm not sure why you think carry forward of unused annual allowance from a previous year is possible?

This might help,

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/carry-forward/

So am I right in saying that my mistake was thinking that the carry forward rule allows me to carry forward if my earnings go beyond £60k OR up to 100% of what I earned, when in actual fact the carry forward rule is only applicable if I've earned over 60k in the current tax year?

So the carry forward rule only relates to earnings, and not a lump sum obtained from elsewhere?

Marcon

valuepack said:

Dazed_and_C0nfused said:

valuepack said:

Thanks everyone for your responses. 

I just want to give an example to illustrate what I want to do, and I'd really appreciate it if people could point out where I'm going wrong, if indeed I am. 

I earn about 35k.

I estimate that I'll receive about 100k inheritance.

Let's say during year 24-25, which is nearly over, I've paid 10k into my workplace pension, including employer contributions.

By the time I reach end of year I can have paid in a further 25k of my lump sum into my workplace pension. This would mean my pension contributions would equal my earnings.

Then, having maxed out my pension contributions for 24-25, I can use the carry forward rule and revisit year 23 -24. 

Let's say I earned 34k that year and paid in 9k in total pension contributions.

Using carry forward, I can then pay 25k of my lump sum into that year's pension contributions. 

Again, I've maxed out my pension contributions for that year but have not gone over my earnings amount.

Then, rinse and repeat for the two previous years.

This way, using the numbers in my example, I could pump my inheritance into my pension and get tax relief as I've not exceeded my annual earnings for any one year.

Is this not a good vehicle to get my inheritance invested?

You cannot ever "revisit" a previous tax year when it comes to pension contributions.

As you still haven't used all the 2024-25 annual allowance (£60k) I'm not sure why you think carry forward of unused annual allowance from a previous year is possible?

This might help,

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/carry-forward/

So am I right in saying that my mistake was thinking that the carry forward rule allows me to carry forward if my earnings go beyond £60k OR up to 100% of what I earned, when in actual fact the carry forward rule is only applicable if I've earned over 60k in the current tax year?

So the carry forward rule only relates to earnings, and not a lump sum obtained from elsewhere?

Yes and yes. You aren't the only person to have been caught out by this and won't be the last by a long chalk!

Grumpy_chap

valuepack said:

I earn about 35k.

I estimate that I'll receive about 100k inheritance.

Let's say during year 24-25, which is nearly over, I've paid 10k into my workplace pension, including employer contributions.

By the time I reach end of year I can have paid in a further 25k of my lump sum into my workplace pension. This would mean my pension contributions would equal my earnings.

Then, having maxed out my pension contributions for 24-25, I can use the carry forward rule and revisit year 23 -24. 

Let's say I earned 34k that year and paid in 9k in total pension contributions.

Using carry forward, I can then pay 25k of my lump sum into that year's pension contributions. 

Just to be clear, for this tax year (2024-25), the maximum you can contribute to a pension is your relevant earnings, so £35k.  Your contributions include any employee contributions already made into your pension scheme (but contributions made by your employer do not set against relevant earnings but are still constrained by the Annual Allowance).

As your relevant earnings do not allow you to use all of this year's AA, there is no option to consider carry-forward from 2023 - 24 or any earlier year.

What you can do is:
 - Earnings £35k in 2024-25, paid already £10k to pension, contribute a further £25k to pension making sure it is processed ahead of the new tax year starting.  (There can sometime be delays with contributions made very late and debate over when those are then considered to apply.)
 - Earnings £35k in 2025 - 26, standard pension contributions £10k, contribute a further £25k to pension.  You can do this whenever you wish within the tax year but may consider taking into account the possibility of unplanned events reducing your relevant earned income.

valuepack

Thanks everyone for your patience, I get it now

Oh well, at least I can eliminate that as a strategy to get my inheritance invested quickly and efficiently.

@doodling That strategy is worth some investigation.

Qyburn

valuepack said:

I earn about 35k.

I estimate that I'll receive about 100k inheritance.

Let's say during year 24-25, which is nearly over, I've paid 10k into my workplace pension, including employer contributions.

By the time I reach end of year I can have paid in a further 25k of my lump sum into my workplace pension. 

You can contribute up to 100% of your relevant earnings. Employer contributions are not included in that calculation. However to use your example if your own contributions were £10k from your £35k earnings, then you could contribute a further £20k from your inheritance. The pension scheme would add tax relief making it up to £25k.

af1963

As each new tax year passes, you can move another chunk of the lump sum into the pension.   You could contribute three years' worth within a 13 month period from March 2025 to April 2026 ( for 24/25, 25/26, and 26/27). You'd be estimating your future salary and pension contributions for the 26/27 year if you do it in advance in April 26.

You can also get 20k into ISAs for this year and next year, by early April 2025. 

af1963

Also - does your work pension use salary sacrifice ? If so, you might be best to keep some of the inherited money accessible to live on, and make increased salary sacrifice contributions ( you can go down to minimum wage levels).  That gets the same tax relief, but also saves Nat Ins contributions.  Then make an extra personal contribution to a pension, to get tax relief on the remaining amount of salary that you couldn't sacrifice.

squirrelpie

Carry forward is a rich man's tool