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June 3, 2011 7:00 pm

Investors make most of “carry forward”

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Wealthy investors are paying larger contributions into their pension funds as they make the most of new pension rules that allow them to carry forward up to £150,000 of unused annual allowances.

Pension providers say contributions are running at significantly higher levels than last year, when individuals earning more than £130,000 were caught by “anti-forestalling” rules that in many cases limited their contributions to £20,000 a year.

But new pension rules that came into effect from April made it possible for individuals who were prevented from claiming the full allowance last year of £255,000, to make up for it now with contributions of up to £250,000 (see box).

“Suddenly the handcuffs have come off,” says Mary Stewart, director of Hornbuckle Mitchell, a pension provider. “The new pension rules are creating some interesting opportunities to make sizeable contributions and that is exactly what we are seeing.”

Under the rules, it is possible to carry forward a maximum of £50,000 of unused allowances from the previous three tax years, in addition to this year’s allowance of £50,000. It is also possible to create an extra contribution of £50,000, explains Stewart.

“If the pension scheme member has not had a ‘pension input period’ end in this tax year already, they could choose to end it early, allowing another £50,000 to be contributed,” she says.

Investors are also said to be making strategic decisions to boost their pensions now, as they will not be able to make additional contributions once in flexible drawdown, the new facility with no limits on how much income can be taken.

AJ Bell, the pension provider, says contributions in excess of the annual allowance (where the clients will be using carry forward) are more than 400 per cent higher than in 2010/11.

But the provider adds the carry forward is not the only driver for this contribution surge.

“The government’s own statistics indicate that the number of higher-rate taxpayers will increase by 20 per cent this year, with additional rate taxpayers increasing by 12 per cent,” says Billy Mackay, marketing director with AJ Bell.

“In simple terms, a lot more people could benefit from tax relief on pension contributions.”

James Hay, another
provider, says it has received hundreds of requests from clients looking to maximise contributions, but warns that future years might be less generous for higher earners. “The 50 per cent tax rate may be dropped before the next election, so people need to move soon,” says Neil MacGillivray, head of technical support with James Hay.

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