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Technical: Carry forward of unused annual allowance

13 February 2019

In this article the Prudential technical team explains the history and use of carry forward of unused annual allowance for pension savings, including calculation examples.

Key points

  • Annual allowance rules operate separately from the tax relief rules. You need to consider both when looking at pensions saving.
  • Carry forward relates only to unused annual allowance (not tax relief from earlier tax years) and does not need to be ‘claimed’.
  • Pension Input Periods prior to 6 April 2016 did not have to be aligned with the tax year and did not change retrospectively.

Article first published by Prudential 6 April 2018

Carry forward of unused annual allowance was introduced for tax years 2011/12 onwards, coinciding with the first reduction in Annual Allowance.

It allows those who use up the Annual Allowance in any particular tax year to carry forward any unused allowance from the previous 3 tax years. Those who have triggered the Money Purchase Annual Allowance (MPAA) cannot carry forward to increase the MPAA limit in any tax year. However, carry forward can still be used where the tapered annual allowance (TAA) applies for any tax year on or after 2016/17.

PIPs from 6 April 2016

The transitional arrangements implemented in the 2015/16 tax year (explained later) have resulted in all pension schemes having a Pension Input Period that is aligned with the tax-year (6 April to 5 April), and there is no longer the opportunity to change the PIP period.

As such from 6 April 2016 it is the contributions (money purchase schemes) or benefit accrual (defined benefit schemes) within the relevant tax year that will be measured against the relevant Annual Allowance, which considerably simplifies the calculation of the Pension Input Amount for AA assessment.

Anyone who is eligible can carry forward any unused annual allowances from a tax year in which they were a member of, or joined, a UK registered pension scheme. This is a very broad rule.  ‘Member’ includes:

• Active: currently accruing/ building up benefits in the scheme, paying individual contributions or receiving contributions on their behalf, for example, from an employer or any other third party

• Deferred: has a paid-up fund, or a right to receive pension benefits at a later date

• Pensioner: receiving payment of benefits from the scheme, such as a scheme pension

• Pension credit: member has received a pension credit (following a divorce and as directed in a pension sharing court order)

Does this include someone in receipt of pension income from a lifetime annuity?

Please note:Once benefits are flexibly accessed it is not possible to use carry forward to increase the limit of the money purchase annual allowance. Therefore, this section is in relation to a lifetime annuity that is only allowed to reduce under circumstances prescribed before 6 April 2015.

An individual receiving income from an annuity policy may be a member of the scheme, but this depends on how the annuity policy is set up.

If the annuity policy is in the name of:

1. the pension scheme trustees, the pension is regarded as being paid under the pension scheme and the individual is a pensioner member.

2. the individual and was set up as a deferred annuity that automatically became a registered pension scheme, this means the individual is a pensioner member – as the annuity policy is itself a registered pension scheme.

3. the individual but it is not a registered pension scheme, this means the individual cannot be a pensioner member nor a pension scheme member. However, it is unlikely that HMRC would have intended any annuitant to be treated more restrictively than a pensioner member simply because of the way their contract was set up.

So, in summary, where a lifetime annuity has been purchased using registered pension scheme funds (it is not a Purchased Life Annuity), the annuitant could use carry forward but not to increase the MPAA if this applies.

Does this include a member of a non-UK pension scheme?

Where a client was not a member of a registered pension scheme but was a member of a non-UK pension scheme it is important to find out if they satisfy the definition of a currently-relieved member of a currently-relieved non-UK pension scheme. If they do, they are eligible to use carry forward. More information can be found in the Pensions Tax Manual.

Points to note:Where a client has a rebate-only personal pension plan this makes them eligible to use carry forward. Or they may have joined an occupational pension scheme when working for an employer many years ago. Regardless of how long ago they left service, if they remain a deferred member in the scheme they are eligible to use carry forward. Just to clarify, there is no requirement that they could actually have paid any further contributions to the existing scheme.

Also, there is no need:

  • To have had a Pension Input Period (PIP) ending in that tax year, or
  • For contributions/accrual in that tax year, or
  • To have had relevant earnings in that tax year, or
  • To have been living in the UK in that tax year.

The carry forward facility applies on a rolling 3-year basis, so for:

  • 2011/12 allows use of unused allowance from 2008/09, 2009/10 and 2010/11
  • 2012/13 allows use of unused allowance from 2009/10, 2010/11 and 2011/12
  • 2013/14 allows use of unused allowance from 2010/11, 2011/12 and 2012/13
  • 2014/15 allows use of unused allowance from 2011/12, 2012/13 and 2013/14
  • 2015/16 allows use of unused allowance from 2012/13, 2013/14 and 2014/15
  • 2016–17 allows use of unused allowance from 2013/14, 2014/15 and the pre–alignment tax year (capped at £40,000 and less post-alignment inputs)
  • 2017–18 allows use of unused allowance from 2014/15, the pre-alignment tax year 2015/16 (capped at £40,000 and less post-alignment inputs) and 2016/17
  • 2018–19 allows use of unused allowance from the pre-alignment tax year 2015/16 (capped at £40,000 and less post-alignment inputs), 2016/17 and 2017/18.

Where the annual allowance is exceeded in a tax year it is the unused allowance from the earliest year that is used first.

Where a Tapered Annual Allowance (TAA) applies in a tax year (TAA was introduced from tax year 2016/17 and you can read more about this in our Tapered Annual Allowance article), it is only the unused TAA amount that can be carried forward from that tax year. Having a nil pension input amount does not mean you carry forward the full standard annual allowance. For high income clients, you still need to work out any TAA limit before you can calculate available carry forward of unused annual allowance.

Transitional aspects – special rules for 2008/9 to 2010/11

(Continued)