The goal of maximising your savings into any product or account is an important step towards reaching your financial goals, and this should form part of your financial plan. Depending on your circumstances, this can be achieved by making regular savings from your income, or by allocating one-off or occasional lump sum contributions should there be capital available.
Focussing on pensions, recent Conservative governments have reduced the amount available to contribute to pensions to a maximum of £40,000 per annum – known as the “Annual Allowance”. This limitation on pension savings can be frustrating for individuals with higher salaries, or remuneration including windfalls or bonuses, and for companies with profits in excess of this who may have used these monies to make pension contributions over this limit.
Legislation exists to assist in these scenarios that allow unused allowances from the previous three years to be utilised in the current year. This rule if applied in full allows for potential contributions of up to £160,000.
However, savers should consider and take care with:
- Ensuring membership of a pension scheme in each of the previous 3 years.
- Accounting for earlier pension contributions
- Considering “Net Relevant Earnings” for the current and previous years.
- Understanding any reductions applied to your annual allowances, for high earners or if you have previously taken benefits from your pension.
Whilst every saving decision, including pension contributions, should consider all factors in your personal financial planning, carried-forward annual allowances can be a case of “use it or lose it”.
At the end of the tax year on 5th April, any unused allowance from the earliest year in the calculation (for the 2022/23 tax year, this is the 2019/20 tax year) will be lost and not able to use again. It is important therefore to consider whether you or your employer have the scope to make use of any unused allowances in making a lump-sum contribution to your pension fund before the end of the tax year.
This article should not be construed as advice or a personalised recommendation. The most suitable solution for you will depend on your own personal circumstances.
No action should be taken without seeking further formal advice.
MHA Moore and Smalley is regulated by the Financial Conduct Authority, FCA registration number 448716.
