Crunch time for carry forward

A valuable tax planning tool vanishes on April 5, when the rule allowing personal pension-holders to "carry forward" surplus tax relief to a subsequent tax year ends.

Most people with personal pensions do not make the maximum contributions they are entitled to, perhaps because of cash flow problems or not having enough ready money for a lump-sum contribution.

But in a year when you do have the extra cash for your pension you can make your maximum contribution and then make up six years of unused relief from past years. This can be useful for personal pension purchasers with volatile earnings - anyone from authors to actors or those who might have big bonuses one year and very little the next.

This process, confusingly, is called carry forward. From April 6 2001 you will no longer be able to carry forward unused contributions. But you will continue to be able to "carry back" contributions. This is where you can treat a payment as if it had been made in the last tax year, which is useful if you were previously a lower rate tax payer.

You must fully make all the contributions for the current year before you can carry forward any previous years. You can then go back six years and calculate any unused relief - the difference between the maximum contribution and that already paid.

Independent financial adviser William Sallitt of Carrington Investment Consultants says people thinking about using carry forward should not wait until the last minute, but take advantage of the lull in the equity market.

"With the current low stock market levels and imminent changes in pension legislation, people should seriously consider taking advantage of 'carry-back/carry-forward' before it is too late," he says. "There is a bit of paperwork to do, but an accountant or IFA should be able to help and give advice on how much you can realistically invest."

But Mr Sallitt says be sure to get your request in early as many advisers are bombarded on the last day of the tax year with people deciding to invest. You have to know your earnings for this and previous years. The tax relief depends on your tax status in the year you make the contribution, not the years in which you have unused relief.

The changes only relate to personal pensions. They do not affect those with the old-style retirement annuity policies (also known as section 226 plans) sold before April 1988.

It is possible to pay a contribution before April 6 and carry this back to 1999-00. Doing this now will mean the contribution is treated as being in the 99-00 tax year, where the rate of relief is 23% instead of the current 22%.

Pension consultant Gary Ford at IFA Wentworth Rossays: "Combine this with carry forward relief and you can use up all unused relief from 93-94. But you must submit your claim before January 31 2002."

Rethink your risk profile

At a time when the government is trying to increase funding in pension plans through its low charging stakeholder product, the closure of Equitable Life to new business and the subsequent likely fall-off in likely investment returns has left a lot people wanting reassurance that pensions are a safe investment.

IFA Tom McPhail of Torquil Clark says: "A pension is not some strange mythical beast. It is just an investment with special tax treatment. Anyone who doesn't understand how pensions and with-profits funds work should really get some advice."

He advises people with little pension experience to look at lifestyle investment strategy.

Your pension will then follow a simple risk profile, which is traditionally equities when you are reasonably young and have little to lose, managed funds in middle age for more security, and the safety of gilts and cash in the run-up to retirement.

Web link-ups

Online information fund information provider trustnet.com is launching a new, free, service to help investors get to grips with venture capital trusts - tax saving funds which invest in start-up and other new companies.

Nearly £1bn has been invested in the 50 or so VCTs launched so far and the site gives details on each, including links to each VCT's website.