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The annual allowance for pensions

Scary image to reflect the horror and complexity of the annual allowance for pensions!

Ever heard the slogan: Tax doesn’t have to be taxing? I’m guessing whoever came up with it never had to deal with the annual allowance for pensions savings.

Oh, and don’t get me started (yet…) on its ghastlier sister, the tapered annual allowance.

These finickity pension rules are enough to make even hardened tax accountants sigh into their calculators.

But let’s be brave and together try to get through this guide to the annual allowance.

What is the annual allowance and why does it exist?

The annual allowance for pensions savings for 2019/20 is £40,000. This means that if your total contributions into your pensions during the current financial year are greater than £40,000 then you must pay a tax charge.

This tax charge is an individual’s top marginal income tax rate (for example 40% for a higher-rate tax payer) on the amount that’s contributed to a pension that’s above the annual allowance.

When you put money into a pension, the Government provides you with tax relief. The underlying principle behind this pension tax relief system is that you defer taxes. You get back the tax you paid today in your pension, but you will later pay tax when you take the money out as income.1

With the annual allowance, the Government is basically capping the amount of tax relief it will give you in a year. In effect, it is saying: “You’ve got enough from us this year, you’re on your own now”.

This may strike you as quite reasonable in principle. Why should the Government subsidize the pension savings of the ‘metropolitan elite’?

And in general I agree. But there are some issues.

Firstly, people don’t earn a consistent salary over their career. They are likely to earn more in later years – and at that point they’ll want to contribute much more to their pensions.

Secondly, lots of government tinkering has resulted in some unintended consequences. These unintended consequences appear to undermine the spirit of what the introduction of the annual allowance was meant to achieve. More on that later.

Tax relief

Let’s quickly touch on the tax relief rules and how they work.

Currently, tax relief on gross individual pension contributions is limited to £3,600, or 100% of relevant UK earnings per tax year. The annual allowance sets the upper limit on the amount of pension contributions on which you receive tax relief.

There are two types of pensions tax relief:

  • There is ‘net pay’ tax relief, where salary is paid after deducting pension contributions. Therefore you automatically get full tax relief.
  • There is also ‘relief at source’, where HMRC ‘tops-up’ each contribution by 20%. Higher- and additional-rate tax payers have to complete a self-assessment tax return to receive extra relief.

Importantly, there is no carry forward of unused tax relief.

Annual allowance

The annual allowance is based on ‘pension input amounts’ – that is, the total of all your pension contributions.

The annual allowance can be carried forward.

The annual allowance varies depending on how much you earn and whether or not you have taken some pension benefits.

Mayday A-Day

The annual allowance came into existence on 6 April 2006. This date is known to those in the pensions industry as ‘A-Day’.

A-Day is the pension expert’s equivalent to the birth of Christ. Everything in pension land is now dated as pre-A Day or post-A Day.

Prior to A-Day there were a bunch of rules and limits as to how much could be contributed to an individual’s pension. It was all very convoluted and messy.

A-Day cleaned the place up – sort of.

The annual allowance was initially set at £215,000. In 2010/11 it was lifted up to £255,000. Then in 2011/12 it was dramatically slashed down to £50,000. Finally, a further cut in 2014/15 gave us today’s £40,000.

A highly boring technical addendum: You’ll notice some asterisks by some of the figures in the chart above. Due to the dramatic change in the annual allowance in 2011/12, a one-off pension ‘straddling’ adjustment was available. We won’t delve into the detail, but if 2011/12 is relevant for your annual allowance, remember that there were some special rules that applied. In 2015/16 the Government aligned pension input periods to tax years. Before then, pension input periods and tax years were not necessarily aligned. The Government adjusted the annual allowances so that for the period 6 April 2015 to 8 July 2015 the annual allowance was £80,000, while for the period 8 July 2015 to 5 April 2016 the annual allowance was zero. But you could carry forward the lower of £40,000 and £80,000 less what you input between pre-8 July; minus what you input post 8 July. In effect, you could get up to £80,000 in annual allowance. We’re pretty sure they do this kind of thing just to win bets with co-workers.

With the introduction of pension freedoms in 2015, a money purchase annual allowance was introduced to further limit the amount of tax-relief available for those who have accessed some of their pensions.

In 2015/16 and 2016/17 the money purchase annual allowance was £10,000. In 2017/18 it was reduced to £4,000.

Finally in 2016/17 the Government introduced the tapered annual allowance, potentially reducing an individual’s allowance to a minimum of just £10,000. (Again, more on that later).

How the annual allowance works

The annual allowance is assessed each tax year (unlike the lifetime allowance, which is assessed at certain points of time when you interact with your pension).


The first step is to calculate your total pension contributions in the relevant pension input period.

For defined contribution pensions this is straightforward:

For defined benefit pensions it’s a little bit more complicated:2

To calculate the ‘value’ of a defined benefit pension you take the total amount of annual pension built up at the start and end of the year and multiply by a factor of 16.3

It’s easier to see with an example:

Tina is a member of a final salary scheme giving her a pension of 1/60th pensionable pay for each year of service.

At the start of the pension input period Tina’s pensionable pay is £80,000 and she has 31 years pensionable service.

At the end of the pension input period Tina’s pensionable pay has risen by 5 per cent to £84,000 with 32 years pensionable service. Tina does not have any other pension arrangement.

Step 1: Calculate opening value

Annual Pension: 31/60 x £80,000 = £41,333.33
Multiply by factor of 16: £41,333.33 x 16 = £661,333.28
Increase by CPI (say 3%): £661,333.28 x 1.03 = £681,173.27

Step 2: Calculate closing value

Annual pension: 32/60 x £84,000 = £44,800
Multiply by factor of 16: £44,800 x 16 = £716,800

Step 3: Calculate pension input amount

Closing value – opening value = £716,800 – £681,173.27 = £35,626.73.

Tina is within the annual allowance and there is no charge.

Carry forward

Unused annual allowance from pension input periods that ended in the previous three tax years can be carried forward and added to the annual allowance for the current pension input period.4

You don’t need to make a claim to HMRC to use carry forward, but keep a note if you do – just in case.

The annual allowance charge

As we warned earlier, a charge is levied on the excess of pension contributions above the annual allowance.

For example, if an individual has a total of £50,000 contributed to their pension in a year and they have no carry forward, the excess of £10,0005 will be liable to a charge.

The charge is applied at the individual’s marginal rate. In effect, it sits on top of an individual’s taxable income.

For example, for a higher-rate taxpayer the tax charge on an excess pension contribution of £10,000 is £4,000 (£10,000 x 40%).

If you’ve exceeded the annual allowance you’ll need to record this in a self-assessment tax return. When doing your tax return there’s a specific box to fill in if you’ve contributed in excess of the annual allowance.

It’s possible to get your pension scheme to pay the charge for you, under the ‘scheme pays’ system. This is available if:

The total annual allowance charge is over £2,000, and

The inputs are in excess of the standard annual allowance in the scheme.

Pension schemes must provide the information you need for calculating your pension inputs automatically each year. But don’t rely on your various schemes, it’s up to you. If necessary, contact your pension provider to get the information you need.

The tapered annual allowance

No doubt the bit you’ve been (eagerly) waiting for. In 2016/17 the Government introduced the tapered annual allowance. Aimed at high earners, this tapering sees the annual allowance reduced for people who have ‘adjusted income’ over £150,000 and ‘threshold income’ over £110,000 a year.

The tapered annual allowance reduces by £1 for every £2 over £150,000 down to a minimum of £10,000.

Both adjusted income and threshold income need to be above the limits for the tapering to come into effect. If you are over only one of the limits, the taper doesn’t apply.

Calculating adjusted and threshold income

Both adjusted and threshold income include all taxable income. The difference between the two can be summarised as:

  • Adjusted income includes all pension contributions (including employer and salary sacrifice)
  • Threshold income excludes pension contributions.

Unintended consequences

Unfortunately, there have been many unintended consequences with the tapered annual allowance.

Most prominently it has snared doctors in a pensions tax trap, with many doctors landed with five-figure tax bills.

But more importantly, it’s just plain stupid policy. The tapered annual allowance is fiendishly complicated to apply because it relies upon predicting future total income and pension contributions before they become known.

In some cases, people who contribute in excess of £40,000 can face a marginal tax rate of over 100% – that is, they are actually worse off if their salary increased!

For instance, an individual may earn above the adjusted income but below the threshold income meaning the taper doesn’t apply. But then a small pay rise – even if non-pensionable – can put somebody over both and result in a big tax charge.

Most in the private sector have avoided the issue by paying benefits in kind. However, public sector workers lack the flexibility to avoid getting stung with big charges due to being in defined benefit schemes. Usually the only way to avoid a big tax charge is to opt out of their pension – which can mean losing other valuable benefits such as death in service payments for dependents.

I’m sure some readers may not feel much sympathy for public workers and their defined benefit pensions. But it is not in society’s benefit for experienced doctors, firefighters, judges, and so on to do less work on account of arbitrary and complex tax rules.

The good news is that the Chancellor is reviewing the taper. The bad news is that we’re unlikely to see any changes soon.

There appears to be a lack of appetite to scrap the taper. The much-promised pensions bill finally popped up in the queen’s speech – but there was no mention of the taper in sight (and besides, who knows what the Government will soon look like anyway!)

Money purchase annual allowance

In 2015 the Government brought in the fabled pension freedoms. These changes necessitated the need to introduce a new allowance in order to prevent individuals crystallising a pension and then ploughing the money – plus a dollop of lovely tax-free cash – back into a pension.

Thus the money purchase annual allowance (MPAA) was born.

From 6 April 2015, an individual taking income from flexi-access drawdown or taking an uncrystallised funds pension lump sum triggers the MPAA.

Initially, the MPAA was at £10,000 before being dramatically slashed to £4,000 on 6 April 2017. The MPAA triggers if an individual:

  • Takes a pension commencement lump sum and income (from flexi-access drawdown)
  • Takes an uncrystallised funds pension lump sum
  • Exceeds the GAD rate in a capped drawdown (i.e. turns a capped drawdown into a flexi-access drawdown).
  • Takes a flexible annuity (depending on specifics)

It does not trigger when an individual:

  • Takes a pension commencement lump sum only
  • Remains in capped drawdown
  • Takes an annuity (non-flexible)
  • Takes a small pot (via commutation)

The money purchase annual allowance applies to defined contribution pensions only, not to defined benefit accrual. However, defined benefit pension contributions are still tested against the annual allowance.

There is no carry forward of the money purchase annual allowance.

It’s worth noting too that the money purchase annual allowance doesn’t replace the current annual allowance. If applicable, the money purchase annual allowance and annual allowance will be calculated alongside each other.

Just like with the tapered annual allowance, the complex rules have lead to people falling into traps. The Office for Tax Simplification has called for it to be reviewed.

Annual allowance planning

It’s possible to avoid getting stung by the annual allowance with some careful planning.

The first thing to do is to keep track of unused allowances that can be carried forward.

Secondly, forecasting future salary changes and bonuses can help determine when the annual allowance may kick in and give you time to prepare.

Thirdly, most private sector employers are already alert to the annual allowance and in particular the tapered annual allowance, and so offer benefits in kind in lieu of pension contributions.

Also remember a golden rule of taxes:

Paying a tax charge isn’t necessarily a bad thing.

For example, an individual opting out of their pension to avoid a tax charge even when there is a net benefit is like them asking their employer to stop paying their salary because they’ll have to pay income tax.6

When assessing what you should do about the annual allowance, think about:

  1. What do you get? Consider levels of contribution, future salary increases, and any interactions with tapered allowance
  2. What does it cost you (net of tax relief) to get those benefits?
  3. Is there a net benefit after tax charges? If you’re in a defined benefit scheme with ‘scheme pays’ what is the commutation factor?
  4. What will you get if you stopped contributing today? (Consider the loss of other benefits such as death in service benefits)
  5. How valuable is the alternative benefit? (Your employer paying a benefit in kind)
  6. What will you do instead of contributing to the pension? Will you receive more salary? Invest in ISAs or other investment vehicles? Are there differences in access and risk factors compared to the pension?

To conclude where we began, this is a fiendishly complicated area so seek professional advice if you need it. And do let us know of anything we’ve missed in the comments below.

Phew – we made it!

  1. It’s a bit more complicated than that – what with tax-free cash and the lifetime allowance – but we have to at least try to simplify things! []
  2. Note that if the difference in the following calculation is a negative amount then your pension input is nil – HMRC isn’t generous enough to give you extra allowance to carry forward for future years. []
  3. If you have any lump-sum benefits, these are added after applying the 16 times factor. []
  4. As we mentioned earlier, bear in mind that tax relief on pension contributions is capped at 100% of relevant UK earnings per tax year. []
  5. £50,000 – £40,000 []
  6. I’ve borrowed this excellent phrase from Pru Adviser. []
{ 49 comments… add one }
  • 1 Fremantle October 31, 2019, 11:44 am

    Fiendish. Would be better to have a total lifetime tax relief allowance, and perhaps fixed relief at 30% across all tax bands. This would address “fairness” concerns and promote pension savings for basic rate payers, and probably result in savings for HMRC.

  • 2 Mr Optimistic October 31, 2019, 11:50 am

    Well done !

  • 3 PaulH October 31, 2019, 1:37 pm

    A minor suggestion – I found the section starting “To calculate the ‘value’ of the pension..” confusing, as it wasn’t immediately clear that it was clarifying only the second of the two pension type calculations. Perhaps just rephrasing as “To calculate the ‘value’ of a defined benefit pension…” would help the slower amongst us 🙂

  • 4 Gentleman's Family Finances October 31, 2019, 1:49 pm

    I think I understood everything there (but I was taking notes) and more importantly how it would affect me and my family.
    However, you can understand how the average person doesn’t have the time, inclination, interest or ability to understand pensions – they are very complicated!
    My personal belief is that (when used right) pensions are great and that includes for those who are seeking Financial Independence now – but you need to know what you are doing!

  • 5 The Details Man October 31, 2019, 2:31 pm

    @Fremantle – indeed a lifetime tax relief allowance would be better, but I don’t think it’s something the HMRC are capable of tracking. As far as I’m aware, HMRC have no records of historical pension contributions. A 30% relief seems the sensible compromise – and it has been mooted for longer than I can remember. But we’re still stuck with what we’ve got.

    @Mr Optimistic – Thank you. Praise from Monevator readers is hard earned and I treasure it!

    @PaulH – That’s a good point, if TI is reading hopefully he’ll make your suggested change.

    @GFF – I agree, it’s a huge ask for any person to wrap their head around. I don’t think doctors, policemen, anybody should have to be performing mental gymnastics to work out if extra work pays or punishes. It’s fiendish even for IFAs and accountants!

  • 6 Christian October 31, 2019, 2:37 pm

    I work in the industry and I agree that the whole system is ridiculously complicated, especially Tapered Annual Allowance. Other options like a flat rate of take relief would also be complicated.

    My biggest bugbear is the Money Purchase Annual Allowance. Imagine, someone could decide to take say £10,000 of income from their pension to fund e.g. a new car. They decided they’d probably be contributing £7,000 to their pension per year until they retire, so the £10k MPAA wasn’t an issue. Then a year later, the MPAA was cut to £4,000 and even though they didn’t take any any further income, they still get caught by the lower MPAA. Over 10 years, this means a higher rate tax payer would be missing out on £12,000 of tax relief. They could at least have kept the people who took income before the change at £10k MPAA as long as they don’t take further income.

    I know this is a situation that probably affect relatively few people, but how are you supposed to plan when the rules effectively change retrospectively?

  • 7 JediMaf October 31, 2019, 3:45 pm

    Excellent work on this subject again TDM.
    I wonder what percentage of charges incurred by those earning DB benefits are actually being paid at the moment. The fact that most people don’t take specialist tax/financial advice and are unlikely to be able to work it out themselves, but it is met be declaring via your self-assessment, leads me to think it might be quite low. Another thing for HMRC to chase people down on in 5-10 years time. It almost starts to make sense why HMRC costs circa £50bn a year to run.

  • 8 Mathmo October 31, 2019, 4:10 pm


    Never mind that the LifeTime Allowance makes all this completely redundant!

  • 9 The Investor October 31, 2019, 4:15 pm

    @PaulH @TDM — Change made, thanks for the useful feedback. 🙂

  • 10 Neverland October 31, 2019, 4:31 pm

    The lifetime allowance was the big change at A-day in 2006 and its also the aspect of current pension legislation that is much more likely to catch most monevator readers with a big tax charge.

    The annual allowance taper really is a 1% thing. Go play around this for the reality of how much people get paid: https://www.ifs.org.uk/tools_and_resources/where_do_you_fit_in

  • 11 Mr Optimistic October 31, 2019, 5:25 pm

    It’s hardly any easier in the USA
    Headache territory.

  • 12 Vanguardfan October 31, 2019, 6:37 pm

    @jedimaf -DB pension schemes have to notify when individuals exceed the annual allowance (I assume they tell HMRC as well). Though that only works if it is the individual’s only scheme

  • 13 The Details Man October 31, 2019, 8:49 pm

    @Christian – oh you’ve brought up my biggest bugbear. I think the change to the MPAA was scandalous. We had a government touting pensions freedoms, encouraging people to access their pots flexibly based on a set of newly minted rules. Then only a year later changed the rules. Disgraceful!

    @Mathmo / Neverland – if TI obliges, and feels like a sucker for more editorial punishment, I hope I can give the same treatment to the LTA.

  • 14 Jonathan October 31, 2019, 9:45 pm

    Masterly summary. I almost feel I understand taper relief (that is high praise), not that it concerns me personally.

    Femantle came in very quick, and spot on. A lifetime allowance is really all that is needed, set to be realistic for those where the salaried “pay for the job” can reach over £100K such as doctors and other senior public servants, so probably in the region of £1.5M – though it should be properly calculated not plucked out of the air as a convenient round number. And a constant level of tax relief rather than giving an extra benefit to higher rate taxpayers – around but not necessarily exactly 30%.

    (Disclosure: I have personally benefited from the higher rate pension relief).

    But in a way all these restrictions are necessary corollaries of the pension freedoms which have generally been a good thing – in our case it allowed my wife (who is younger than me) to have an effective strategy for retiring early and still allowing us to fund our planned retirement expenditure.

  • 15 AVB November 1, 2019, 8:48 am

    Only bit I didn’t understand was ‘tax relief on gross individual pension contributions ’ which I’ve since found out refers to contributions that don’t come from a salary and/or employer, i.e, relevant to those who don’t receive a salary.

    Good to see a UK article, most US articles say to max out the 401 but the £40k we can put in the UK is a lot larger than the equivalent US figure, hence we have to weigh up the pros/cons a bit more. E.g if you earn £41k a year putting £40k in a pension each year wouldn’t be practical for most people, but the dynamic gradually changes the more you earn. I’m putting about £30k a year in (incl employer contributions) and £20k into an isa as I value being able to access the isa earlier than my pension. In fact the isa will hopefully fund an earlier retirement and plug the gap until I can access my pension. Thus it’s really an optimisation question, overfund the pension and you risk having to keep working as you can’t access it soon enough, or put more into the isa and miss out on the tax relief at source and risk underfunding your pension.

  • 16 C November 1, 2019, 10:36 am

    My response to all of this shenanigans was simply to work and earn less. There comes a point in everyone’s live when time > money. With this fiddling the Govt. has simply encouraged a group of wealthy individuals to take a hard look at bringing that date forward.

  • 17 Marco November 1, 2019, 12:49 pm

    The LISA is a much better pension vehicle and cuts all the complications, for DC pensions.

    I’m a doctor and the only sensible solution to the DB tax trap is to work a lot less to cap earnings under 110k. I have a lot more free time now (10 weeks A/L and most Fridays off) so it’s all good.

    Of course, once you drop to under 110 might as well drop to 100k and avoid the 62% income tax cliff.

  • 18 Richard November 1, 2019, 4:30 pm

    Enjoy these pension articles!

    Just running the numbers as I understand. So you have a threshold income of 110k and you get 40k pension so total adjusted is 150k. No tax charge. You get a salary increase of 10k. You are left with ~3.8k after tax and personal allowance claw back on that 10k. Adjusted is now 160k. So you lose 5k allowance (35k). This basically means you earn an extra 5k. Tax on this is ~3k. So you keep ~800 of the 10k. Of course if the pension contribution creeps up as well that will reduce again, but I guess you would have been caught anyway as over 40k so not really fair to include.

  • 19 gadgetmind November 1, 2019, 5:26 pm

    I’ve was doing this dance for decades, trying to keep track of pension input periods for different pots, worrying about Special Annual Allowance in 2011, changing PIPs for some pots (and starting new pots) to max everything out, making to draw pretty diagrams for my accountant to help him understand, and then in my final year of work it all went to pot, I got hit by full Tapered AA, went over LTA, and ended up handing £20k of my pension to the tax man.

    That was about the right point to knock work on the head, switch from being one of the persecuted and reviled people paying the tax to hold the whole sorry ship together, and instead be a nice retired person paying tax that amounts to about 7% of income.

    I guess that’s what these rules were designed to encourage as why else would they be there?

  • 20 Pension nightmares November 1, 2019, 7:54 pm

    Epic effort delving into that….. are you an insomniac!

    Limited Company contributions…
    Another slightly simpler track for pensions is that if you are lucky enough to own your own limited company. Then the company can pay direct into your own pension. This is not a personal pension contribution but a payment direct from the company.
    So your own company can pay you the £40k annual allowance (so long as you have not used up any of this allowance). This payment is deductible from the profit and loss account of your company which is a great way of getting cash out of your company into your pension effective free from tax.

  • 21 stephens November 1, 2019, 11:07 pm

    Another vote for a drains up on the lifetime allowance. Following a bit of spreadsheet work I think I understand it and its implications (to avoid a tax hit at 75 I concluded I have to start drawdown at 57) but a second (more expert) opinion would be appreciated

  • 22 Sparschwein November 2, 2019, 4:30 pm

    @TDM, fantastic summary. It’s a rare (if not unique) piece that explains these pension rules well.
    Pension tax relief is very valuable for higher-rate taxpayers. Well worth understanding the subtleties and optimising contributions.

  • 23 pensioncomplications November 2, 2019, 4:51 pm

    Thanks for this very helpful article. I am just starting to fall into the annual allowance tapering such that next year I’ll probably be at £10k annual allowance.

    However, given the 3 year carry-forward rule I have c.£80k of additional allowance that will reduce to c.£50k next year. I’m assuming the logical thing to do would be to make an additional £30k (£80k – £50k) pension contribution this year, receiving £13.5k tax relief (£30k * 45%) that will otherwise be lost.

    But giving up £16.5k (net) today for £30k I can access in >25 years time (with all the political uncertainty/rule changes in the interim) is not an easy decision

    Have I got this right? Anything more I should be thinking of? Thanks

  • 24 ZXSpectrum48k November 2, 2019, 4:54 pm

    Good summary TDM. The pension system is so completely messed up. LTAs are an example. For those with DC pensions, the LTA at around £1.055mm means that in inflation-linked annuity terms you’re looking at just £20-25k/annum. For a DB pension, a multiple is used of 20-25, so they are allowed £40-50k/annum. Functionally DB pension holders have twice the LTA that DC holders do. Completely unfair to DC pension holders.

    The problem is, in the absence of a level playing field, it forces those of us with DC pensions to use financial engineering to avoid such an unfair situation. I took fixed protection at £1.8mm on my LTA but even that now results in just a miserable <£40k annuity. So as early as 2009 I started selling long-dated deep OTM calls on equity indices such as the S&P inside my pension to cap it's upside. Against that I've bought exactly the same long-dated OTM calls inside my ISA. Net risk zero but end-result is over £700k in value transferred from my pension to my ISA. When the government come up with rules that favour the public sector over private sector, expect those of us in the private sector to find ways to a mechanism of screwing around with their stupid biases.

  • 25 Marco November 2, 2019, 4:59 pm

    There are advantages to DC pensions too though. When you die your money stays with your estate and can be inherited tax free for example.

    The basic problem is that LTA and AA are far too low.

  • 26 Marco November 2, 2019, 5:04 pm

    Also, nobody buys an annuity these days with a DC pension.

    A 1 million invested pension pot should allow drawdown of 40k per year safely so similar to DB pensions.

    Public sector pensions aren’t as great as people make them out to be, and also cap earnings of higher earners due to taper tax trap.

    I’ve dropped from adjusted income of 180k to threshold income of 100k

  • 27 Andrew November 3, 2019, 12:06 pm

    In the NHS it is worse. You don’t know until 6 months down the line how much your pension has grown. It is dependent a growth figure.

    So you could put 30000 into your pension but 6 months later it is deemed to have grown by 20000. —> Tax charge.

    It is completely impossible to plan

  • 28 The Details Man November 3, 2019, 12:08 pm

    @ C / Marco / gadgetmind – As a chartered accountant this kind of thing is incredibly annoying. Arbitrary tax rules shouldn’t be pushing people out of work – especially those as valuable to society as doctors. I’m glad that the doctors are kicking up a stink because they’ve got this on the agenda in a way that us boring accountants haven’t been able to.

    @ Pension nightmares – how did you know? As you say, Company pension contributions are an effective way to distribute profits out of your company.

    @ pensioncomplications – yes you can use the 3 year carry-forward and utilise that to avoid a tax charge. Make sure to check how much allowance you have in each of those years (given some of your allowance might have been tapered). It’s a tough choice giving up money today for uncertain money tomorrow. Consider carefully what alternatives you have to putting the money into your pension (ISA, spouse’s ISA/pension, other investment or savings opportunities) and how that will enable you to meet your financial plans (pay for children, retire early etc.)

    @ ZXSpectrum and Marco – I’m more sympathetic to the rationale behind the LTA but for the reasons you’ve both touched on it’s application has left much wanting. At the risk of arousing TI’s socialist creds: rich people need pensions too. The current tax rules seem engineered against that.

  • 29 The Details Man November 3, 2019, 12:09 pm

    @ Andrew – you must have posted the same time as I. Yes, this is a huge issue – you don’t know it’s an issue until after the fact. And that’s if you even get your pension statement on time… https://www.ft.com/content/645517c0-fc81-11e9-98fd-4d6c20050229 (FT: “NHS misses deadline for staff pension statements)

  • 30 Moggers November 5, 2019, 9:51 am

    This comment hasn’t seen as much response as I would have imagined. What you are doing is something that I’ve always wondered about …. whether you could use opposite instruments to ‘hedge’ your pension with an ISA legally.

    The benefits are actually incredible because if you get the direction that it ‘flows’ correct, you can get access to your pension cash much much earlier.

    And given that that pension cash includes a lovely great swathe of tax relief…..

    I guess as long as it’s just a hedge, there’s no dodginess about it. But you could do it from person to person too…

  • 31 Mark Meldon November 5, 2019, 8:17 pm

    @ Marco.

    People do still buy annuities with DC pensions! It depends on so many variables: when, health, how, fixed or increasing, blended with drawdown, blah, blah. Indeed, it is my (unpopular) view that flexi-access drawdown is a looming disaster for those with minimal secure lifetime income and relatively small pots.

    There are no safe withdrawal rates. Sequential risk can bite (hard). Things change very fast with assumptions if your investment strategy get holed below the water if your fund falls in value, perhaps substantially, when you least expect it.

    Choose carefully, out there!

  • 32 Vanguardfan November 5, 2019, 10:39 pm

    @mark meldon I agree. Many people do indeed buy an annuity. I work for Pensionwise and see plenty of people with ‘minimal secured income’ (often just the state pension) and small pension pots. I rarely see people for whom the state pension is less than half of their retirement income.
    I think people with large incomes and comfortable DB pensions can forget just how well off they are, relatively speaking.

  • 33 MJ Jones November 7, 2019, 9:26 pm

    I really don’t understand when adjusted income kicks in – I earn over 110, but all my additional interest/earnings are within ISA wrapper, so provided I stay below 150 do I need to consider anything else which effects my annual allowance.

  • 34 Marco November 7, 2019, 10:22 pm

    If you are in a defined benefit pension scheme you need to request your annual allowance statement for the last 4 years, then pray!

  • 35 Gentleman's Family Finances November 8, 2019, 7:48 am

    @Mark Meldon I totally agree with you on this. Annuities got a bad name and the tail winds of lower interest rates that helped boost retirees asset values (and house prices) are then seen as being cruel to them with lower annuity rates.
    A £100k pension pot used to buy a 6% annuity is just as good as the same pension put that grew to £200k and pays 3%.
    Boomers having their cake and eating it too?

    The alternative to annuities is just something which hasn’t collapsed and ruined everyone YET – not saying it will happen but at least with annuities there is lower risk but putting all of your money in a trusted equity income type fund and hoping that you can mitigate all risk and stay rich forever is wishful thinking.

  • 36 Andy November 27, 2019, 7:25 pm

    @ZXSpectrum48k – What broker do you use for “selling long-dated deep OTM calls on equity indices such as the S&P inside my pension ” ?

  • 37 TCA November 30, 2019, 7:33 pm

    In a relief at source situation, when somebody pays more than £40k (gross) into their pension by carrying forward unused annual allowance, does the pension provider automatically add basic tax relief without question or do they require confirmation from HMRC before doing so?

    I realise there’s a delay with some providers anyway for below £40k contributions, but in my case Aviva add the credit right away. So just wondering if there would be automatic credit as usual and any tax issues are for the self assessment return?

  • 38 Rosie December 1, 2019, 6:44 pm

    A comment for your Oct 25 post.

    @Vanguard, you can add another person to those who have Vanguard products because of Monevator. Not so much because TI and TA recommend them, but more because of the valuable content and discussion in comments led me to research the passive area much more thoroughly as I knew where to look because of Monevator. (There is no way I am going near an IFA).

    I manage the half million pound assets of 3 different people and I am repeatedly surprised Vanguard is not supporting one of the most informative resources out there (globally, not only UK) for non professional investors. (I dislike the term retail investor as it makes me feel like a loaf of bread).

    Given Bogle started Vanguard as a co-op and its owned by its investors, how about all of us here who hold Vanguard write to them asking exactly why they do not have a small appropriate ad on Monevator?

    Also, I second the suggestions for a donate button and also a subscription donate button (you can easily set them up on Paypal). Only 100 of us bunging you a tenner a month on a volunteer basis and that’s a grand a month sorted.

  • 39 The Investor December 2, 2019, 3:39 pm

    @Rosie — Hi! Thanks for all your generous comments. 🙂 You suggest:

    How about all of us here who hold Vanguard write to them asking exactly why they do not have a small appropriate ad on Monevator?

    A fellow UK financial blogger kindly gave me a contact at Vanguard to have a chat with. This representative suggested initially a paid-for-post ‘influencer’ style relationship. While I’ve got no problem with that sort of thing in principle as long as it’s all declared to readers, but it’s not something I am willing to do at Monevator. We have never accepted paid-for posts, nor even embedded text link ads. (We do include affiliate links, but that’s a different category that I’m comfortable with).

    So I made my case for a straightforward advertisement in front of one of the most on-target audiences in the UK. We’ll see if anything comes of that, nothing so far. 🙂 So if anyone wants to lobby Vanguard on our behalf, please feel free — much appreciated!

    Regarding the donation button, I think that ship has sailed to be honest. It’s a bit like how I can’t write a diary because I wish I’d written one in my (frankly far more interesting!) 20s and 30s. There’s a ‘sunk experience’ cost that I can’t get past. I’ve had at least 50 emails over the years flat out asking me how to donate/contribute money, including a few large sums, but I’ve always said thanks but just please spread the word of the site for anyone who might benefit from it.

    What we should do is either some sort of membership thing or some sort of Patreon thing — to get some kind of regular subscription income we can allocate resources around — plus of course we should finish our book, and everyone should buy three copies and spread them to all their friends and family. 😉

    I’m stuck writing a missing chapter about REITs at present, which shouldn’t be a hurdle but I’ve had some sort of long-term mental block about getting it done. (Partly because the rest of the standard is pretty high!) Once that’s done we can finally try to move onto getting the thing into editing etc.

    Anyway, all this is very off-topic so best no replies on this thread thanks, just wanted to comment on the kind vibes and give a heads up. 🙂

  • 40 Jason February 11, 2020, 2:54 pm

    Hopefully I’m not too late posting a question to this article. I’m currently researching using the Carry Forward option into increase my pension contributions this tax year. I have found the information here very useful but I’m afraid under the ‘Tax Relief’ section I do not understand the sentence ‘Importantly, there is no carry forward of unused tax relief.’

    I was under the impression that if I was to pay £50,000 net into my pension as an example, using carry forward, the government would ‘add’ 20% basic rate tax relief (£12500). I could then also claim higher rate tax relief up to the amount of tax I had paid via my tax return. Is this not the case or have I misunderstood the term ‘carry forward of unused tax relief’?

    I am aware that I cannot contribute more than I earn this tax year using carry forward.

  • 41 AVB February 11, 2020, 3:33 pm

    I think the no carry-forward is only applicable to pension-funding from a source other than employment. I.e. disconnected from your earnings. This is applicable to people who are unemployed but funding a pension from funds other than employment.

    This is different to the annual allowance of £40k which can be carried forward for three years. This is based upon pension-funding from your gross salary (including employer contributions).

    That’s how i read it anyway.

  • 42 Sparschwein February 11, 2020, 8:42 pm

    I’ve used Carry Forward, all it does is transfer unused Annual Allowance so that your yearly allowance can be >40k. Caveat – I have not researched any other scenarios than *employment* income.

  • 43 Jason February 12, 2020, 9:41 am

    Thank you @AVB and @Sparschwein. I contribute to a company pension scheme but I’m intending on opening a SIPP for additional contributions to give access to a larger range of funds. Any Carry Forward I use would go into the SIPP but I don’t want use Carry Forward without some tax benefit.

  • 44 AVB February 12, 2020, 9:46 am

    you should get the tax benefit, the fact you are funding a sipp instead of a company pension is irrelevant. All that matters is how much of the £40k you’ve used up over last 3 years – as the tax relief is against your gross earnings. In your case it sounds like you’ll be getting the relief from unused annual allowances from past 3 years.

  • 45 AVB February 12, 2020, 9:51 am

    Or to put it another way, you will be claiming back against the tax you paid over last three years, based on unused annual allowance that you now want to use. Again it’s irrelevant whether you do this through company pension or sipp as either way it is related to the tax you paid in historic earnings and historic unused allowance, in my opinion.

  • 46 Vanguardfan February 12, 2020, 10:37 am

    For carry forward you still need earnings in this tax year to cover the contributions. So if you earn £60k you can’t carry forward more than £20k.

  • 47 over75 March 31, 2020, 3:44 am

    Hi to all you knowledgeable ones,
    I m over 75 and have found a SIPP which allows me to continue making contributions “Gross without claiming tax benefits”. The revenue advises that there is no age limit but gives very little further advice.
    However, I cannot find any advice as to if there is any limit to annual or total contributions I am allowed to make.
    Any comments would be appreciated.
    I am of the opinion that as I am not claiming any tax benefit, then there is no limit,

  • 48 gadgetmind March 31, 2020, 6:36 pm

    @over75 You can contribute any sum between £0 and your entire Earned Income, and £3600 gross even if Earned Income less than this. I’d expect your Earned Income to be zero, so you can contribute £2880pa net grossed up to £3600 by HMG. £60 a week but subject to tax, not to be sniffed at.

  • 49 gadgetmind April 1, 2020, 8:48 am

    Sorry, £60 a month!

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