Kirk Rice Blog

Carry Forward For My Pension – Is It An Option?Written on March 16, 2020 by Kirk Rice LLP

The Question:

My son runs his own business which is doing well, but despite my nagging he does not have a pension. He said it is possible to pay large amounts into a pension by using carrying forward and he would rather wait until he is older and pay large amounts in then. Unfortunately, I could not come up with a good response to him and would be interested in your comments.

 

Kirk Rice LLP answers:

The maximum personal annual contribution into a pension for an individual without adverse tax consequences is £40,000 or their income if lower. For a company contribution, it is £40,000 (no reference to income). This overall limit includes personal and employer payments. It is however reduced for those earning more than £150,000 by £1 for every £2 of an income of over the £150,000 dropping to £10,000 for those earning more than £210,000. This is a generous limit and sufficient for most people, but situations can arise where someone wants to invest more and the scenario of using carry forward, your son mentions is not unusual especially for people who run their own business.

Such individuals may be wary about committing large amounts because of cash flow, especially in the early years of the business. As individuals get older and the business more secure, they may feel more confident about committing larger amounts (deferring pension planning) and this is where carry forward can be useful. This allows the carry forward of unused allowances from the previous 3 tax years. Using carry forward, your son could, in theory, invest £160,000 into a pension; £40,000 each for the current and 2 previous tax year. There is, however, one flaw in your son’s strategy.

To be eligible for carry forward, you must have been a member (not necessarily paid into it) of a registered pension scheme in the tax year being carried forward. Your son has never had a pension and so carry forward is not an option for him and until he starts one, it never will be. To give him the opportunity in the future, a pension would need to be opened so he could forward. Further considerations are that in future pension rules are almost certainly going to change, which may include a removal of carry forward. The rates at which tax relief applies to pensions may change for the better or worse. Your son’s own tax position may change, and there may be a tax advantage or disadvantage by delaying. There is also the risk that he actually does not have the money to invest in the future.

Any reader interested in pension advice from one of our financial planners email info@kirkrice.co.uk to arrange an appointment.