What you need to know about the annual allowance

While the scope to make six-figure pension savings year on year has disappeared, the introduction of ‘carry forward’ in 2012 allowed individuals to use unused annual allowance from the three previous tax years.

This is useful if individuals without significant savings in most years happen to have a tax year in which they have a big jump in accrual either by accident or by design.

It is worth remembering, however, that there are groups of savers who either do not have access to carry forward, or whose access is restricted.

A complete lack of access is only really an issue when someone has not been a member of any registered pension scheme in the years from which carry forward is planned or needed. So, for example, someone who has moved to the UK for the first time in the current tax year and so has not built up any historic pensions would not be able to use carry forward from earlier tax years.

It is important to understand that any form of registered pension scheme membership creates eligibility for carry forward.

AJ Bell is frequently asked whether someone needs to be an active member of a pension scheme to be eligible, but this is not the case. Someone who had last accrued benefits 20 years ago, but who remained a member of that scheme is as eligible as someone who has made contributions in each intervening year.

In fact, even an individual whose only pension scheme membership is receipt of income from a lifetime annuity is still able to use carry forward. Therefore, it’s a low hurdle, but still one that can trip up the unwary.

Money Purchase Annual Allowance

When considering restrictions on access to carry forward, we also need to consider the money purchase annual allowance.

Having only introduced carry forward in 2011 to 2012 it was only a matter of a few years before the government began to tinker with eligibility.

This came as a result of the pensions freedoms in 2015, which, to be fair, was a momentous event.

While the impact of the MPAA clearly impacts members of defined contribution schemes to a significantly greater extent than members of defined benefit schemes the same cannot be said for the tapered annual allowance.

The potential for individuals to abuse tax rules by paying significant contributions, primarily employer contributions through salary sacrifice, created a need for the Treasury to restrict the scope for abuse. It did this by saying anyone who had taken benefits under the pensions freedoms faced a reduced annual allowance of £10,000 in respect of their money purchase contributions.

Furthermore, those subject to the MPAA cannot carry forward annual allowance from previous tax years.