My income is from multiple places - can I pay into a pension?

Q: I am always told that, as my income is solely from pension and interest on bank savings - and until two years ago rental income - this is all ‘unearned income’, and therefore the maximum I can pay into a SIPP per year is £2,880 (£3,600 after tax rebate). I’m always disappointed to hear this! Is it correct, and if not, could I make up for previous years when I’ve paid in this rather-limited £2,880 a year?

A: Thanks very much for your question. You have, I’m afraid, been advised correctly.

The amount that can be paid into a pension with tax relief is normally limited to 100% of your earnings (up to the Annual Allowance of £60,000). Delve a little deeper into the rules, however, and you’ll find this does come with some extra conditions.

HMRC does not talk about ‘earned’ or ‘unearned’ income in its rules, but it does say that contributions to pensions with tax relief are limited to 100% of your ‘relevant’ earnings.

You’ll find the full list of what counts as ‘relevant’ earnings in the HMRC Pensions Tax Manual, but it includes:

• employment income, such as: pay, wages, bonus, overtime, or commission if taxable
• a redundancy payment above the £30,000 tax exempt threshold
• benefits in kind which are taxable
• profit related pay
• Statutory Sick Pay and Statutory Maternity Pay (SMP) if paid by the employer and taxable

No mention, then, of any money earned from savings, investments, dividends or rental income. These do not count towards your earnings for the purposes of making pension contributions. As such, and assuming you have no ‘relevant’ earnings (and satisfy a number of other conditions, such as being under age 75), the maximum pension contribution on which you can normally receive tax relief is £3,600 gross a year - equivalent to a contribution of £2,880 net contribution with basic rate tax relief added.

You also ask whether you may use any unused Annual Allowance from the preceding three years to make up pension contributions now - a process called ‘carry forward’.

• You can read a fuller explanation of Carry Forward here. 

Two points are relevant here. First, you mention that you have been receiving pension income. If this is from a pension accessed flexibly then you may have triggered the Money Purchase Annual Allowance (MPAA). If the MPAA has been triggered, pension contributions above £10,000 for 2023/24 onwards may give rise to an Annual Allowance charge. This is separate from the personal contribution tax-relief limit, which is based on current year relevant UK earnings or the £3,600 gross basic amount. If the MPAA applies, unused MPAA itself cannot be carried forward to increase the £10,000 money purchase annual allowance in a later year.

Second, even if the MPAA does not apply, I’m afraid contributions under Carry Forward would still need to pass the ‘relevant’ earnings test. If you have no current relevant UK earnings, carry forward will not let you obtain tax relief on personal SIPP contributions above the normal £3,600 gross amount. Carry forward may only help where your pension input amount would otherwise exceed the annual allowance and you have enough current-year relievable contributions or employer contributions to use the extra allowance.

This would seem to close this off as a method for boosting your pension savings now.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. SIPP eligibility and tax treatment depends on individual circumstances and tax rules may change. You cannot normally access money in a pension until age 55 (57 from 2028). If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.