The rules for carry-forward/carryback are as convoluted as the plot of an Agatha Christie novel. However, all this will be changed by the sim-ple expedient of abolishing the lot.
The end of the 2000/01 tax year marks the arrival of stakeholder pensions and the new defined-contribution regime. There will be a number of changes to the way personal pensions are administered, such as the self-emp-loyed paying contributions net of basic-rate tax for the first time and waiver benefit having to be written as a separate contract outside the boundaries of a personal pension.
Prominent in these changes is the fact that the carry-forward/carryback facility is in the last throes of its life as far as personal pensions are concerned. The use of carry-forward has enabled individuals to make up for lost time by paying a contribution based on net relevant earnings from up to six years in the past or up to seven years when combined with carryback.
Carry-forward has always been a useful retirement planning tool. Individuals who are close to retirement have been able to supplement their pension by means of a substantial one-off contribution while those who have had to miss out on making contributions in previous years, perhaps because times were not as good as they are now or because the money was needed for other purposes, have been able to make up for those missed contributions.
Carry-forward is also a useful tool when looking at tax planning. As contributions to personal pensions attract tax relief at an individual's marginal rate of tax, it has been beneficial for contributions to be suspended in years when an individual has been a basic-rate taxpayer and paid in subsequent years when that indivi-dual is a higher-rate taxpayer.
However, from April 6, 2001, the carry-forward facility will only be available when combined with carryback and will be lost for ever from January 31, 2002. It will still be available under retirement annuities but it has not been possible to set up any such policy since 1988.
So, those individuals who have not made use of their maximum entitlement in previous years have only a limited amount of time to make up for those lost contributions. It is important to take action sooner rather than later if the potential to maximise retirement income is not to be lost.
The following points should be remembered when considering the use of carry-forward for the last time – and, perhaps, in some cases, the first time.
Carry-forward can only apply to an individual's contributions. Employers cannot make use of carry-forward.
The amount that can be carried forward from a previous year is the amount that could have been paid based on age and earnings in that year, less any contributions (including employer contributions) already paid in respect of that year.
Tax relief will be given for the year in which the contribution is actually paid – or deemed to be paid if carry-back is used – not the year from which unused relief is being carried forward.
It is necessary to maximise unused relief in the current year before looking at unused relief from previous years.
The total amount paid in the current year, including both the current year's entitlement plus the amount carried forward, cannot exceed an individual's earnings in the current year although carryback can be used to help in this situation.
The demise of carry-forward/carryback is a price to be paid for much needed simplification in the tax treatment of pension contributions.
Rather than dwell on its passing, it is necessary to check what unused relief remains from previous years and take action to make use ofthat unused relief. Act now before it is too late. If you do not use the facility now, it will be lost for ever.