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How to give your pension a bumper injection

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Rules allowing savers to contribute more to their pension than normal are set to become less generous this year.

Most people are able to save up to £40,000 a year into their pension tax-free, under annual allowance rules. If you contribute more than your allowance you face a hefty tax bill.

But special ‘carry forward’ rules allow you to use up any unused annual allowances going back three years.

Three years ago – in the 2013/14 tax year- the annual allowance was £50,000. After that it fell to the current £40,000 limit.

That means this tax year is the last time the 2013/14 tax year will fall within the three-year period that applies in carry forward calculations.

“In practice, this means that, whatever unused allowance you have available for carry forward now, it’ll be £10,000 less in 12 months’ time,” says Ed Monk, associate director for personal investing at Fidelity International.

“If you are in the fortunate position of maxing out your contributions this year, then you could use carry forward to take unused allowances from the three previous to give your pension a bumper injection.”

Using ‘carry forward’ rules is particularly valuable for people approaching retirement who want to maximise the help on offer before they stop work and their income falls.

“The years before retirement are often exactly when large sums are available, thanks to typically higher earnings, lower costs once the mortgage has been paid, children have become financially independent and possible windfalls from inheritance,” says Monk.

A warning for savers is ‘carry forward’ rules come with certain stipulations, including that the amount contributed must not exceed your total earnings for the current tax year and you must have been a member of a pension scheme in the preceding tax years.

How to find out if you have any unused allowance left

You can find out what allowance you have left – for the current tax year and previous ones if you’re using carry forward – by contacting any scheme you have contributed to in that time.

Keeping records of your pension contributions from year-to-year can help you to keep track of your carry forward allowance.

Monk says: “You can make your contributions up until 6 April 2017 for this current tax year, but it must be in time for your scheme to register the contribution.

“After this, the process is simple – pension contributions in excess of the available annual allowance will be carried forward automatically.”

    Annual allowance limits:

  • 2013/14 – £50,000
  • 2014/15 – £40,000
  • 2015/16 – £40,000
  • 2016/17 – £40,000

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