Try forward thinking

PENSIONS are complicated and riddled with jargon, making it easy to miss out on some valuable benefits, such as “carry forward” rules.

These allow you to boost your company or personal pension pots by mopping up unused pension allowance from the last three years, and claiming tax relief on it.

Hargreaves Lansdown senior pensions and retirement analyst Helen Morrissey called carry forward one of the “lesser-known secrets to getting a better pension”, and she urged savers to take advantage if they can.

Under the annual allowance, savers can invest up to £40,000 in a pension each year, and claim tax relief on their contributions.

In practice, this is far more than most people can afford to pay, but there may be times in your life when you can pay in more. If you receive a lump sum such as an inheritance or bank a capital gain from selling a property or other assets, it can be tax-efficient to invest that in a pension and claim tax relief.

Carry forward rules can help you do this. Morrissey said they can also help self-employed workers with a “lumpy” income, who often struggle to make regular monthly contributions: “Instead, they can make several ad-hoc contributions, say, when they have cash to spare, land a big job or get a windfall.”

Theoretically, you could carry forward £40,000 pensions allowance from each of the last three years, then add it to your annual allowance to invest a maximum £160,000 in a pension.this assumes you have not made any pension contributions at all in that period. If you have, the total is reduced accordingly.

There is another limitation, said Andrew Tully, technical director at Canada Life: “Even with carry forward, you cannot contribute more than you earn in that tax year. So if you earn £30,000 the most you can pay in is £30,000.”

There is another trap to watch out for,tully adds.

Once you start taking taxable income from your pension, which you can do from age 55, you will trigger something called the money purchase annual allowance (MPAA). He said: “The MPAA limits the amount you can invest in a pension to just £4,000 a year. It also means you can no longer use carry forward.”

Yet for the right person, carry forward can work really well.

Tully said a higher earner on £92,570 could invest £46,000 in a pension at a cost of just £27,600, after claiming 40 per cent tax relief. He added: “Pensions are complicated but things get really confusing once you add tax. Consider talking to a specialist financial adviser.”

Whatever you do, do not exceed the annual allowance.

Morrissey said: “The excess will be added to the rest of your taxable income for that year, and subject to income tax.”

Which is yet another piece of pensions complexity that makes saving for retirement so tricky and off-putting.