Pension AVC 3 year rule

flopsy1973

Hi 
I have been getting slightly conflicting information from financial professionals regarding adding to my pension. I earn 32k and basic rate tax payer. So after deducting pension contributions from my salary the balance left is what i can contribute to my pension as lump sum and get tax relief ?
I have been told i can go back 3 years also and do the same ? i think this is the wrong information ?

Dazed_and_C0nfused

flopsy1973 said:

Hi 
I have been getting slightly conflicting information from financial professionals regarding adding to my pension. I earn 32k and basic rate tax payer. So after deducting pension contributions from my salary the balance left is what i can contribute to my pension as lump sum and get tax relief ?
I have been told i can go back 3 years also and do the same ? i think this is the wrong information ?

You can never go back 3 years, in any situation.

And from what you've posted you won't be able to use carry forward of unused annual allowance, as you have to used this year's £60k first.

hara____

There are two limits you have to stick to:
- less than your earnings
- less than the annual allowance (£60k)

See:
https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/the-annual-allowance

The option for 'carry forward' from past years only applies to the annual allowance. But as Dazed and Confused suggests, that won't apply to you as the earnings limit will be the binding constraint.

flopsy1973

So I can only contribute to my earning level but there is max of 6k per year is that right don't understand why I can't use previous years ?

ClashCityRocker1

flopsy1973 said:

So I can only contribute to my earning level but there is max of 6k per year is that right don't understand why I can't use previous years ?

60K including employers (DB uses different calculation)

dunstonh

flopsy1973 said:

So I can only contribute to my earning level but there is max of 6k per year is that right don't understand why I can't use previous years ?

Employee contributions can only go to 100% of your earnings.  As you earn £32k, the maximum employee contribution is £32k (employer contributions can go higher and can use carry forward).

Carry forward requires you to use all of the £60k allowance in this tax year before you can carry forward unused allowances from three years ago.    As you cannot contribute £60k, you cannot use carry-forward unless employer contributions are available to use.

DRS1

flopsy1973 said:

So I can only contribute to my earning level but there is max of 6k per year is that right don't understand why I can't use previous years ?

So now the annual allowance is 60k (not 6k - don't go giving anyone any ideas) and you can carry forward unused annual allowance from the past three tax years.  But only after you have used up this years £60k.  You don't earn £60k so unless your employer is making generous pension contributions for you you will never get to £60k of pension contributions this year.

As explained above the restriction of your personal tax relieved contributions to your taxable earnings (or profits) is a parallel limit and the 3 year carry forward doesn't apply for that.

Why you ask - because its the law.

NoMore

Legally you could use carry forwards, however because of the tax relief limit, once you start contributing beyond your relevant earnings, you stop getting Tax relief and this money is now not worth putting in a pension because of this. You're opening yourself up to it being taxed twice, (on the way in because no tax relief and on the way out). This money would be better in an ISA for tax efficiency not a pension.

Not to mention that most providers don't allow personal contributions that don't attract tax relief, precisely because it's a very bad idea.

flopsy1973

So it  seems only people with a generous 60k salary can contribute and have a better pension provision yet again ?

NoMore

flopsy1973 said:

So it  seems only people with a generous 60k salary can contribute and have a better pension provision yet again ?

Never understand this argument, because it's all about the tax relief and they pay more tax. It's not a government bonus, its relief on tax you could have paid. Therefore, if you're not subject to much tax, you don't get much tax relief.

If you have other money, there's plenty of other options that you can use to save this money tax efficiently for retirement (ISA for example, you get £1000 PSA, hrt don't)

dunstonh

flopsy1973 said:

So it  seems only people with a generous 60k salary can contribute and have a better pension provision yet again ?

No.  Some with zero salary (or the more typical £12,570 salary) can use carry forward.      

It basically exists for people who have choppy income from one year to the next.  It was introduced (in its current form) when the annual allowance was significantly reduced from £255,000 to £50,000 in 2011.

£60k is not generous.