WOMEN'S FINANCE
Pensions -- Carry Back and Carry Forward

By Sarah Wilson
December 27, 2000

Pensions! Yuk! Who wants to talk about pensions?

Not me, but unfortunately we've got to because, if you're one of the women who is eligible to top up your Personal Pension, then you've only got three more months in which to do it.

If you are paying into a Personal Pension Scheme, it's time to check up on whether or not you have made your maximum contributions over the last seven years. As of April 2001, the facility which allows you to catch up on payments missed in previous tax years, known as "Carry Back" and "Carry Forward", will be taken away for ever. Carry back and carry forward payments allow people with fluctuating income, such as the self-employed or those taking career breaks, to top up their Personal Pensions as circumstances allow.

However, the Government plans to put an end to this with the introduction of Stakeholder Pensions in April. Under the new Stakeholder system, you will be able to make payments of up to £3,600 per tax year into your pension, irrespective of your income. You won't be able to make payments for any years you have missed, as at present. So if you think that you may want to boost your personal pension contributions, you need to start looking into it now.

Maximum contributions to a Personal Pension Plan (PPP) are based on a percentage of your Net Relevant Earnings (NRE) in the tax year. This percentage increases as you near retirement, as set out in the table below:

Age at 6 April       Percentage of NRE       Max. Payment
                                          (where NRE=£90,600)

35 or under                  17.5              £15,855
36-45                        20                £18,120
46-50                        25                £22,650
51-55                        30                £27,180
56-60                        35                £31,710
61 and over                  40                £36,240

Net Relevant Earnings is defined as:

1. Employment income, including benefits in kind but excluding revenue from share option schemes;
2. Income from property;
3. Royalty income from patents;
4. Self-employed income, with the exception of investment income.

...all less business expenses, losses and capital allowances.

If you have missed some contributions in the past, the "Carry Forward" facility allows you to catch up. You can pay more into your pension than your "Maximum Contribution" in the current tax year would usually allow, by using up leftover pension allowances from previous years. You are only allowed to make carry forward payments to your pension when you have already made the maximum contributions for the current tax year. The maximum total carry forward payment allowed in one tax year is equivalent to your Net Relevant Earnings in that year, subject to a NRE ceiling of £90,600 for tax year 1999-2000 (see above). You are allowed to carry forward up to six years' worth of unused pension contributions.

The following example shows how you may be able to use carry forward to top up your pension. Julie reached 30 in November 1998, and finally decided to sort out her pension arrangements. Up to that point, she hadn't actually made any pension contributions since leaving University six years earlier. Julie could pay up to 17.5% of each year's Net Relevant Earnings for the past six years into a personal pension scheme. Provided she made the carry forward payments before the end of the 1998-99 tax year, she could pay up to £29,705 into her PPS as follows:

Tax year      NRE      Max. gross contribution
                         (to nearest £)

1992-3           £0                £0
1993-4      £23,000            £4,023
1994-5      £23,500            £4,113
1995-6      £24,500            £4,288
1996-7      £24,750            £4,331
1997-8      £35,000            £6,125
1998-9      £39,000            £6,825

After making the maximum contribution of £6,825 for the current tax year (1998-99), she would look back to see whether there was any unused tax relief for the previous six years. Starting with the earliest year, she would use up all the tax relief in that year before moving on to the next. She could stop either when she ran out of money, or when her tax relief was fully used (in this case, it would not be possible to reach the limit of net relevant earnings in the current tax year of £39,000).

"Carry Back" allows you to make a contribution to your pension for the previous tax year, regardless of your earnings in the current tax year. Carry back payments are treated exactly as if they had been made in the previous year, and are subject to the same limits and tax relief. This facility is particularly useful if you have taken a year out (for example on maternity leave), if you have had a fluctuation in earnings, or if there has been a change in tax rates. Imagine the following scenario.

Karen got a bonus last tax year which pushed her earnings into the 40% tax bracket. This year, she is on maternity leave, so her NRE will be lower than usual. Instead of making a contribution to her PPS this year, she may wish to make a carry back payment for last year. This will allow her to take advantage of the 40% tax relief. She does not have to make any contributions for the present tax year.

If she's feeling adventurous, Karen could also choose to "Carry Back with Carry Forward". This combines the two systems by using carry back to push your contributions back a year, then carry forward for the previous six years before that. This effectively gives you seven years of carry forward, sliding all of your pension contributions back one tax year. As an additional note, if your Net Relevant Earnings are nil in the previous tax year, you can carry back an extra year.

Carry back and carry forward can be confusing. My own experience is that many local tax clerks have either never heard of it or do not fully understand it. Some Inland Revenue staff are uncertain as to what exactly constitutes Net Relevant Earnings, for example in the case of Statutory Maternity Pay. It is possible that if you decide to use this facility it may be queried by the tax inspector. You may therefore want to seek qualified advice to check your sums, or run through the process with the tax office first. Carry back and carry forward is not unfair, illegal, or tax evasion, in spite of what some Inland Revenue clerks might think!

The Government has decided to end carry back and carry forward as it believe the rules are confusing -- or possibly because it also happens to be rather a good deal for the self-employed and higher rate earners! The axe will finally fall when Stakeholder Pensions come into being in April 2001. Contributions to a Stakeholder Pension will not be income-linked up to annual payments of £3,600, so if your income is nil or very low you will still be able to pay in. You won't, however, be able to make contributions retrospectively after the end of the tax year, so if you haven't got £3,600 spare in a particular tax year, the contribution is lost forever.

Of course, just because this is your last chance to use carry back and carry forward, that doesn't automatically mean that you should top up your personal pension, only that you soon won't have the choice. Apart from all the usual concerns over high charges, inept fund managers and dreadful annuity rates (especially for women), governments past and present have few qualms about tinkering with pensions legislation to ameliorate the fiscal deficits of the day. When joining a pension scheme of any kind, you are effectively sinking a sizeable chunk of your earnings into a financial product that is very long-term, with little or no opt-out, subject to change at any time, with the future benefit undefined and no lower limit to the final value.

Where Next?

• Women's Finance discussion board
• TMF Guide to pensions
• Inland Revenue Guide to PPPs
• Inland Revenue Guidance Notes on PPPs

Women's Finance is published every Wednesday.