My partner is 54 and has a small defined benefit (DB) pension from a previous employer that will provide about £3,000 a year from age 60. She also has a defined contribution (DC) scheme with her current employer where she earns about £15,500 a year.

She pays about £100 a month into her existing scheme and will inherit a significant amount of money in the next six months.

Can she open a SIPP as well as her existing scheme? How much can she pay into her pension (or pensions) each year? Is it possible to backdate contributions and if so, is this easy to do?

John

Tom Selby, AJ Bell Senior Analyst says:

There is no limit on the number of pensions someone can pay into at any one time, so your partner is able to open a SIPP alongside her existing workplace scheme.

The annual allowance for most people is £40,000. This is the total amount that can be paid into a pension by an individual and their employer in a tax year before any tax charges might apply.

Within this allowance, there is a limit on the level of personal contributions you can make and benefit from tax relief. This is 100% of ‘relevant UK earnings’. Broadly, this includes earned income such as salary and bonuses, but not investment income such as property and investment income.

If your partner’s total UK relevant earnings for the 2020/21 tax year are £15,500, this is how much she could contribute personally across her pensions and benefit from tax relief.

This figure is inclusive of pension tax relief. For example, someone with earnings of £15,500 could make £12,400 in contributions to a SIPP from their bank account, with HMRC automatically adding £3,100 to the SIPP via basic-rate tax relief.

CARRY FORWARD

A ‘carry forward’ facility which can allow you to use unused allowances from the three previous tax years in the current tax year. In order to qualify for carry forward, you need to have:

Been a member of a pension scheme during each tax year you want to carry forward from, even if you didn’t make any contributions;

Used up your full annual allowance in the current tax year;

Contributed less than your annual allowance in one or more of the last three tax years (including personal and employer contributions);

Earnings of at least the amount you’re contributing in that tax year, if you are making personal contributions.

It is the last bullet point that is probably most relevant in your partner’s case. Up to £120,000 of extra annual allowances can in theory be carried forward (£40,000 from each of the previous tax years), the amount anyone can pay in personally is still restricted by the person’s UK relevant earnings in the current tax year.

So if your partner inherited a large sum and wanted to pay this into a pension, her annual allowance would still be restricted by her earnings.

To use carry forward, there is no need to fill out any forms. If the annual allowance is exceeded under any single scheme you are a member of, the provider will update you on annual allowance usage for that, and the previous three, tax years. This will allow you to confirm that you used carry forward when completing your self-assessment tax return.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to editorial@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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