New carry forward rules are an opportunity for higher earners to maximise pension contributions and for advisers to create business. By Gregor Watt
To offset the reduction of the annual allowance from £245,000 to £50,000, from April 6, the Government re-introduced the ability to carry forward any unused annual allowance for up to three years and pension providers are getting excited about the possibilities this opens up for IFAs and their clients.
Alliance Trust Savings has highlighted the possibilities for high-net-worth clients who have been restricted by the anti-forestalling rules in place the last two years to make up for lost contributions while the 50 per cent income tax band is still in existence.
Anyone earning more than £150,000 may have found themselves restricted to pensions contributions of just £20,000 in the last two years, for fear of getting caught in the Labour government’s complicated sliding scale of pensions tax relief, which was going to scrap tax relief for any contributions over this level. As the carry forward rules are retrospective, some clients may have as much as £60,000 in unused allowance they can now use up and could pay as much as £110,000 into a pension this year.
Alliance Trust Savings head of pensions Steve Latto says: “The new carry forward rules represent a real opportunity for higher earners to maximise their pension contributions and regain some lost ground experienced due to the anti-forestalling restrictions.
“With the higher 50 per cent rate of tax being temporary, the new carry forward rules will allow individuals to maximise their contributions and the associated benefits. As well as maximising contributions individuals should also ensure that their pension is cost effective to further bolster the potential value of their contributions over time.”
This ability to retrospectively apply the carry forward rules could also be augmented by the clever use of pensions input periods.
According to Hornbuckle Mitchell director Mary Stewart predicts contributions to Sipps will soar this year as advisers and their clients take advantage of the flexibility the carry forward rules offer.
She says if no pension contributions have been made at all in the last three years, when added to this year’s allowance and ending a pension input period early, a client could contribute up to £250,000 in this tax year.
Stewart says: “Contributions will rise strongly this year because those higher earners who have been deliberately held back have a compelling opportunity to pay in several years worth at once.
“The rule changes have created a unique opportunity of which many advisers are well aware. It reminds us of 2006 when the annual allowance rose to £255,000 and pension contributions soared after A-Day.
“The economic situation is also helping by giving people the resources and also the confidence to once again make big contributions.”
A J Bell marketing director Billy Mackay says the firm has already seen a big increase in substantial pensions con-tributions this year due to the increasing number of people caught by the higher rate of income tax.
With the Government predicting that the number of people paying income tax at 50 per cent will increase from 3.1 million to 3.7 million next year, increasing pensions contributions is becoming increasingly popular.
Mackay says: “Advisers and clients will recognise that one of the best ways to obtain relief against the higher and additional rates of tax is through pension contributions. We have already seen a 170 per cent increase in single contributions into our Sippdeal and Sippcentre accounts in the first month of the financial year compared with the same period last year. With the number of higher and additional rate taxpayers on the increase it is no surprise that many are planning their pension contributions carefully to reduce the tax that they pay.”
The ability to use carry forward offers an extra avenue for higher rate tax payers to offset their tax liability.
Mackay adds: “Allowing pension investors to carry forward three years unused allowances is a positive and popular change as it introduces opportunities to effectively plan and maximise your pension contributions and the tax relief available to you.”