Alastair Stewart sends warning about future of pensions
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Thousands of pension savers could double the size of their nest egg in just one year by taking advantage of a forgotten pension planning rule. They could take advantage of pensions tax relief to slash thousands of pounds off this year’s income tax bill at the same time.
Pensions are notoriously complicated and riddled with jargon. That makes it easy to miss out on some valuable benefits as a result, such as “carry forward” rules.
These allow you to boost your company or personal pension pots by mopping up unused pensions annual allowance from the last three years, on top of this year’s allowance.
You could then make a large single lump sum pension payment, and claim a heap of tax relief on top.
The average pension pot at retirement is £50,000, according to research from insurer Aegon. Carry forward rules could help some double that in a year.
Andrew Tully, technical director at Canada Life, calls it the pension industry’s “best-kept secret”, and is urging people to take advantage if they can.
Under the pensions annual allowance, the maximum anybody can invest in a pension each year while claiming tax relief is £40,000.
Tully warns: “You cannot invest more than you earn in a year – so somebody earning £30,000 could only invest £30,000.”
However, carry forward rules allow you to mop up your annual allowance from the previous three years, up to your maximum earnings in that year or £40,000.
So the average £30,000 earner could invest four times their annual allowance amount in one go – £120,000.
Someone earning £40,000 or more could theoretically invest £160,000, but Tully said it’s not quite that simple. “You must subtract any pension contributions you made during the previous three years.”
Most people cannot afford to invest more than they actually earn in a pension – but there are times when it is possible.
If you receive a lump sum such as an inheritance or a capital gain from selling a property or other assets, you could invest that in a pension and boost its value by claiming tax relief.
Carry forward rules can help you do this, said Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown.
“It can also help self-employed workers with a ‘lumpy’, income, who often struggle to make regular monthly contributions. “Instead, they can make several ad-hoc contributions, say, when they have cash to spare, land a big job or get a windfall.”
Workers who earn commission or bonuses can also use carry forward rules to play pension catch up.
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Somebody with the average £50,000 pension pot could use carry forward rules to more than double its size in just one yar – and some could put even more away.
They could also slash that year’s income tax bill at the same time.
The savings will depend on personal factors such as your earnings, but Tully said a higher earner on £92,570 could invest £46,000 in a pension at a cost of just £27,600, after claiming 40 per cent tax relief.
Their pension pot will have swollen and they have saved £18,400 in income tax.
Savers must beware one trap, Tully said. “Once you start taking taxable income from your pension, which you can do from age 55, you will trigger something called the money purchase annual allowance (MPAA).
The MPAA limits the amount you can invest in a pension to just £4,000 a year. It also means you can no longer use carry forward.
Pensions and tax are complicated so consider specialist financial advice, Tully added.
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