Has there been a better time to carry forward unused pension tax allowances?

Originally published on vanguardinvestor.co.uk, 12 February

Did the pandemic present opportunities to improve your finances?

The pandemic has clearly been very tough on so many different people. But there’s also no denying that for those able to work through the pandemic, it’s been a boon to their savings1.

This second group have a great opportunity to use their savings to max out on the tax benefits available on their pensions, not least because of the growing pressure on public finances.

Under current rules most people can save as much as 100% of their income in a pension up to an annual limit of £40,0002. What is perhaps less well known, though, is that you can also carry forward any unused allowances from the previous three tax years. So, technically, it may be possible to put away up to £160,000 in your pension and get back the tax you would have paid on this income.

Whatever your circumstances

Crucially – and this is also important for those who’ve struggled to save money in 2020/21 – this carry-forward option is only open to you if you’re currently an active member of a registered pension scheme. So, if you’re currently not enrolled in a workplace pension scheme, for example, it may be worth thinking about having at least a self-invested personal pension (SIPP), just in case you want to take advantage of this rule in the future.

After all, one of the reasons for the carry-forward rule is to help people who might be self-employed or whose earnings may change significantly year-to-year to save for their retirement. It might be difficult now, but who says you won’t be able to save more when the pandemic lifts?

And even if you are already enrolled in a workplace pension, it may be worth considering having a SIPP also that complements and helps widen your investment choices in the future.

Home working?

As for those lucky enough to have been able to transition successfully to home working, what are your plans for the money you’ve saved by not having to commute each weekday? What about the gym membership you’ve saved on? What about the funds you’ve accumulated because, unfortunately, you haven’t been able to enjoy as much leisure time as normal with friends and family or gone on holidays?

Maybe you’re planning to spend some of your excess savings on much-deserved breaks once the lockdowns are finally fully lifted, whenever that is. But maybe, with the tax-year end approaching, it may also dawn on you that this may be a great opportunity to invest a large sum of money in your pension, especially if you’re a higher-rate taxpayer and don’t mind locking away these extra funds until retirement2.

At present – and, remember, such rules could always be altered in future tax years – most taxpayers are eligible to claim tax relief on pension contributions up to the previously stated annual maximum of £40,000. You get the basic-rate tax back automatically through your SIPP and the rest, if you’re a higher-rate or additional-rate taxpayer, and the rest you can claim through your annual self-assessment forms3.

Depending how much you earn and how much you’re able to put away, this could be a considerable sum of money.

So there you have it: a carry-forward opportunity that may not be here much longer and which could seriously build up your retirement nest egg.You may be thinking about investing, paying off debts, or contributing to your pension. But what will make the most difference to your future and where are the biggest savings going to be made? Have a chat with one of our Financial Advisers and find out if we can help with advice that’s specific to you and your future goals.The latest available, seasonally-adjusted data from the Office for National Statistics shows that the UK savings ratio leapt from just under 8% of average household disposable income at the end of 2019 to more than 27% during the first lockdown of last year. Although it came down to 17% in the third quarter it remains at elevated levels and is likely to have remained so through early 2021.

Especially now that you’re able to access your private pension from as early as age 55, should you want to, rather than wait for the official state pension age.

 3 The annual pension allowance, as of 6 April 2020, is tapered for individuals with a “threshold income” of more than £200,000 and “adjusted income” of more than £240,000. For more, see here. If in doubt, consult an independent financial adviser.


The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Eligibility to invest in a Vanguard Personal Pension depends on your individual circumstances. Please be aware that pension and tax rules may change in the future and the value of investments can go down as well as up, so you might get back less than you invested. You cannot usually access your pension savings or make any withdrawals until the age of 55.

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