Carry Forward Pension Calculator - how much unused pension allowance can you carry forward from previous years?
This calculator works out whether you can maximise your pension contributions in the current tax year by using up unused allowances from the previous three tax years.
Carry Forward is a mechanism that allows individuals to contribute more than the annual allowance (currently £40,000) into registered pension schemes in the current tax-year without incurring any tax charges.
Through carry forward, you can sweep up unused annual allowances from the previous three tax years. This is useful if you are now in a position to make additional pension contributions that you were unable to make in previous years.
Is this available to everyone?
As usual, there are certain rules and caveats that have to be adhered to:
- You must haven been a member of a registered pension scheme in the tax year that you are carrying back to.
- You must have sufficient earnings in the current tax year to cover any amount in excess of this years annual allowance.
To clarify the first point, if you are a deferred member of an occupational pension scheme or final salary scheme from an old employer, have a paid-up pension plan that you no longer contribute into or a Section 32 plan that you transferred benefits into some years ago, all these qualify as a registered pension scheme. You do not have to have paid any contributions into these plans in the previous three years. All that matters is that the plan or scheme is still active. You can pay carry forward contributions into a different or completely new plan if you wish to.
However, as an example, if you started to pay into a pension scheme or personal pension in the last tax year and this is the first pension arrangement you have ever been a member of, then the carry forward will be restricted to the previous tax-year only.
With regard to the second point, you may have deferred benefits within a pension scheme that you left ten years and have made no other pension contributions into any other plan or scheme since that point. In theory, the maximum contribution that you could make is £160,000. This equates to the £40,000 in the current tax year and the same from the three preceding years. However, if your actual income is £25,000 in the current tax year then this is the maximum amount that you will be able to contribute and claim tax relief. If you have no earnings at all, the maximum contribution will be restricted to £3,600. It is important to remember that carry forward relates to unused allowances and not unused tax reliefs. In order to pay a contribution of £160,000 you would need to prove actual earnings of that amount in the current tax year.
Money Purchase Annual Allowance
This new rule, introduced in April 2015, will only affect those aged over 55 who elect to access their existing pension savings via flexi-access drawdown. Once you access your pension funds under the new flexible rules and take any income, you will become subject to the Money Purchase Annual Allowance (MPAA), which is currently set at £4,000 per annum.
The MPAA can also be triggered if
- You take income from an existing Capped Drawdown above the current maximum GAD rate.
- A payment is received from a SSAS
- You had a Flexible Drawdown contract that commenced before 6 April 2015 under the old more restrictive rules, and you have already taken income from it.
This measure was put in place to prevent individuals accessing large portions of their existing pension funds, then recycling them into new pension contributions and attracting tax relief on those contributions. This significantly reduces the scope for such pension recycling. So, how does this work in conjunction with Carry Forward ?
Firstly, this only applies to Money Purchase Arrangements. Members of Defined Benefit schemes can still can still accrue benefits up to the value of £40,000 each year. Therefore, assume that you have £80,000 available for Carry Forward from previous years and you enter a Flexi-Drawdown contract.
If you are still a member of a Defined Benefit arrangement, you could accrue an additional £170,000 worth of benefits in the current tax-year. If you wanted to contribute to a Money Purchase arrangement, the maximum allowable would be £4,000
Note that the MPAA is only triggered once you take INCOME from a flexible drawdown fund. This is an important distinction, because if you only access your 25% tax-free lump sum and take no income, this will not trigger the MPAA. However, anything taken above this amount, even if you take as much as an additional £1, will be classed as taking an income from the fund, and this will trigger the MPAA.
Also, encashing pension plans under the small pot rules will NOT trigger the MPAA.
Carry Forward cannot be used in conjunction the MPAA, and cannot be used to increase the MPAA. Therefore, if you have significant unused allowances and were considering using them before you retire, this will not be possible if you trigger the MPAA, apart from for Defined Benefit accrual.
How does Carry Forward work in practise?
- Annual allowances must be used up in a strict order. Firstly, you need to use up the full annual allowance in the current tax-year, then use up allowances from the earliest carry forward year onwards.
- If a contribution greater than the annual allowance was made in one of the carry forward years, this will reduce the amount to be carried forward to the current tax year.
- Contributions made in the tax years 2008/09, 2009/10 and 2010/10 greater than £40,000 will not be treated as an excess and allowances from previous years can still be carried forward. This is because the annual allowance was previously much higher than the current allowance, so the rules were altered in order not to penalise those who were making then perfectly legitimate contributions at the time. However, a few individuals who made large contributions between 2010 and 2011 may be caught by the straddling pension input rules.
- If you have made contributions to a defined benefit (final salary) pension scheme in the last three years, the calculations can be more complicated. This will be covered in a separate section below.
Mr A has been paying into a personal pension plan for a number of years and has paid £25,000 each year into his plan. His earnings were £70,000 in the 2013/14 tax-year.
||Pension Input Amount
||Unused Allowance (Excess)
The maximum Pension Input Amount in the current year is £125,000 of which £75,000 is the carry forward element. However, as his earnings are likely to be £70,000 in the current year, this is the maximum amount he can pay and get tax relief on. However, if he is employed, his employer could make contributions of up to £125,000 (less any personal contributions he makes) as long as HMRC feel such a contribution can be justified.
Please Note: Because you can go back three years, in most cases earlier tax years start to fall out of the equation. For example, in the 2012/13 tax year, unused allowances from 2008/09 drop out. Or do they? If you had made a contribution in excess of the annual allowance in the 2011/12 tax year this could have been offset by unused allowances from 2008/09. The unused allowance for 2011/12 will be zero, but allowances from 2009/10 and 2010/11 can still be swept up. In reality there are now more tax years to take into account to produce an accurate calculation.
A Pension Input Period (PIP) is a period of time over which detrmines the Pension Input Amount for a pension scheme. A PIP commences when a contribution are first made into a pension scheme and ends on the anniversary of the start date unless steps are taken to alter this.
A PIP does not have to be the same as the tax year. The end date of the PIP will determine which tax year it is tested against for annual allowance purposes. For instance, a member of an occupational pension scheme may receive a pay rise and pension increases each year on 1 January and the PIP could run from 1 January to 31 December each year.
Except for PIPs that commenced on or after 6 April 2011 and were allowed to run to 5 April 2013, a PIP may not exceed 12 months in length. However, in most cases, most people change PIPs to end earlier than they would have in order to maximise pension contributions between two tax years.
It is important to remember that each separate pension arrangement can have a separate PIP. The only point to note is that each pension arrangement can only have one PIP ending in any tax year. It is not possible to amend a PIP that begins on 1 October to end on 31 January as it is in the same tax year. However, it is acceptable to amend it to end on 5 April.
Defined Benefit (Final Salary) Calculations
Working out the Pension Input Amount for a Defined Benefit pension arrangement is slightly more complicated. (If you contribute to both defined benefit and defined contribution arrangements, it can get even more complicated). What the calculation is trying to determine is the capital value of the increase in pension benefits that you accrued from the start of the input period to the end of the input period. These are the steps that you need to take:
- Determine the value of the pension accrued at the start of the PIP
- Multiply the opening value by a factor of 16. If any tax-free lump sum is paid in addition to the main pension instead of being commuted from it, the increase in the lump sum should be added (but not multiplied by 16)
- Multiply this further by the annual increase in CPI up to the September in the previous tax year
- Determine the value of the pension at the close of the PIP.
- Multiply the closing value by a factor of 16
- Deduct the revalued opening value from the closing value to determine the Pension Input Amount
As long as you enter sufficient basic details into the calculator, such as recent pensionable earnings, the start date of joining the scheme and the accrual rate, the calculator will automatically calculate factors such as the relevant CPI rate to be used. Whilst you are free to alter these values if you need to, in most cases just entering the basic information is sufficient. However, to clarify the points above, we will run through them again with a worked example.
- Mr. A joined his employers pension scheme on 06/04/2001
- As of 06/04/2011 he had ten years of pensionable service and his pensionable earnings at the start of the pension input period were £58,000
- The scheme accrual rate is 1/60th of final earnings for each year of service
- The pension at the start of the period is £58,000 / 60 * 10 = £9,666.67
- Multiply this by 16 to get a result of £154,666.67
- The CPI factor to be used in this case is 3.1% - multiply the above figure by 1.031 to get the result of £159,461.33
- At the end of PIP, his pensionable earnings are now £60,000 per annum
- The pension at the end of the period is £60,000 / 60 * 11 = £11,000
- Multiply this by 16 to get a result of £176,000
- Subtract £159,461.33 from £176,000 to get a Pension Input Amount of £16,538.67
In this case, the pension input amount is well below the annual allowance, and he will have scope to pay additional contributions from the current year and from previous years into an AVC or a separate pension scheme (or purchase additional benefits within his current scheme if it is allowed).
Important Note: Individuals who have long periods of service within a defined benefit pension scheme (usually over twenty years) may find that a substantial pay rise, even if their earnings are relatively modest, can swallow up their annual allowance and even breach it and trigger an excess. If you think you may face such a situation, then the first step may be to discuss it with your employer or a Financial or Tax Adviser who specialises in this area.
Straddling Pension Input Period Rules
As the annual allowance was lowered to £50,000 in April 2011, some individuals had made contributions of up to £255,000 in good faith as this was the limit under the old rules. Therefore, for those who would have been adversely affected by this, transitional rules were put in place in the form of a Straddling Pension Input Period.
You only need to worry about this if:
- Your total Pension Input Amount in the 2011/12 tax year was in excess of £50,000
- any of your pension arrangements had a PIP that began before 14/10/2010
- the same PIP ended in the 2011/12 tax year at a date on or before 13/10/2011
If you were one of the few people who met the above criteria, two new PIPs were created:
- from the start date of the PIP until 13/10/2010
- from 14/10/2010 until the end date of the PIP
Any substantial pension contributions made before 14/10/2010 should not incur a tax charge. However, contributions made after that date may generate an excess.
For instance if you contributed £100,000 in the first period and £50,000 in the second period, the calculation would be:
- £100,000 - (£255,000 - £50,000) - As this is less than zero, it is treated as zero, so no charge is incurred.
- £50,000 - £50,000 - As this is zero, no charge is incurred.
However, if we swap the amounts between the two periods, the results are:
- £50,000 - (£255,000 - £50,000) - As this is less than zero, it is treated as zero, so no charge is incurred.
- £100,000 - £50,000 - This generates an excess amount of £50,000.
Unless there are unused allowances that can be swept up from previous years, there is a potential annual allowance charge in respect of this contribution.
IMPORTANT NOTE: This calculator does not take into account straddling input periods. The aim is to keep the calculator as straightforward and easy to use as possible, and adding such functionality for a scenario that will actually apply to very few people will only over-complicate a subject that is already complicated enough. These notes have been added solely to point out that if you have, or think you have been impacted by the straddling rules, you should seek professional financial or tax advice if you are considering making additional substantial pension contributions.
How to use the Calculator
You can add details from as many pension plans or schemes into the calculator as you want. Each arrangement can have different Pension Input Periods. The calculator will automatically break them down between the relevant tax years. You can add both Defined Benefit and Defined Contribution details within the same calculation.
The basic details you need to enter are:
- Your pensionable earnings details. These are not strictly necessary, but if you are a member of a defined benefit pension scheme, these will be needed
- The start date of each pension arrangement
- The start and end date of each PIP (these default to tax years but can be altered)
- For Defined Contribution schemes, such as personal pensions, occupational money purchase schemes, the total amount of pension contributions made (and this includes personal and employers contributions) during the PIP
- If you are paying AVCs linked to a Defined Benefit scheme, enter them separately as a Defined Contribution arrangement
- For Defined Benefit Schemes, ensure that you enter the accrual rate of the scheme. Factors such as the CPI factor and Pension Input Amount will be automatically calculated for the relevant PIP
- Click the button at the bottom of the page to add the pension scheme. There is also a button to remove a scheme if you make a mistake, or are just using the calculator for simulation purposes
- Once you have entered sufficient details, you can flick backwards and forwards between the tabs
- Finally, click on the calculate button at the bottom of the screen to generate the results
The figures projected by the calculator are only for guidance purposes - whilst we aim to ensure the accuracy of our calculators, we can take no responsibility for the usage made of the calculations generated on this site.