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Use or lose the last £50k carry forward

This is the last year you can use the generous 2013-14 pensions carry forward
March 17, 2017

If you underused your pension allowances in the past few years, make sure you don't miss out on the chance to top up your pot using carry forward.

Carry forward allows you to use any annual pension allowance you haven't used during the previous three tax years, provided you were a member of a registered pension scheme. And as the 2013-14 tax year was the last one with an annual pensions allowance of £50,000, before it fell to £40,000, you only have until 5 April to exploit this more generous opportunity.

To be able to make use of your carry forward allowances you must make the maximum available contribution in the current tax year. For most investors the annual pension allowance for the 2016-17 tax year is £40,000.

"If you are in the fortunate position of being able to maximise your pension allowance this year, then you could use carry forward," explains Ed Monk, associate director for personal investing at Fidelity International. "You'll need the money to do this, but the years before retirement are often when such large sums are available, thanks to typically higher earnings, lower costs due to your mortgage being paid off, your children becoming financially independent and possible windfalls from inheritance."

If you have not used up any of your pension allowances from the past three tax years, you could in theory put a sum of up to £170,000 into your pension this tax year. But as you can't receive tax relief on contributions in excess of your earnings in a tax year, your earnings may restrict how much you can put into your pension using carry forward.

However, Andy James, head of retirement planning at Tilney Group, says clients in this situation don't need to use all three years of their carry forward allowance in one go. So, for example, this year you could make a contribution of £90,000 - your 2016-17 allowance plus your 2013-14 allowance of £50,000.

"Allowances from the oldest year are used up first and at the end of every tax year - the 'oldest year' falls away," explains Mr James. "Therefore, any allowances not used from the oldest year - now 2013-14 - will be lost for good if they are not carried forward."

Your 2014-15 allowance and 2015-16 allowance could be used in future years if you expect to use up the annual allowance for those years.

The ability to carry forward allowances is very useful for higher earners whose personal pension contributions are restricted by the tapered allowance. If you earn more than £150,000 and make pension contributions, you will have £1 of tax relief withdrawn for every £2 you earn above £150,000. This means people earning more than £210,000 have an annual allowance of only £10,000. If you make pensions contributions above this amount you will pay income tax on the excess.

But carry forward allows higher earners to make use of more generous unused pension allowances from the past three tax years.

Carry forward also has benefits beyond retirement planning. "Maximising a pension can potentially remove funds from your estate and gives options to leave it to your heirs in a very tax-efficient way, explains Mr James.

But he adds: "With the pension lifetime allowance now set at £1m, care needs to be taken to ensure that contributions and growth in your investments won't take you over this limit, as you will be liable for a tax charge on the excess when benefits are taken."