GMP could leave over 100,000 savers with six-figure tax bills – Royal London

Guaranteed minimum pension (GMP) equalisation could leave over 100,000 workers who secured 'fixed protection' schemes with unexpected six-figure tax bills, a freedom of information request supplied to Royal London has revealed.

After Lifetime Allowance (LTA) for pension tax relief was cut, in stages, from £1.8m to £1m, some workers with high levels of pension savings were allowed to 'lock in' at the higher limits in schemes known as 'individual protection' and 'fixed protection'.

One of the conditions of fixed protection schemes is that the taxpayer does not accrue any further benefits in the future.

Royal London has found that the process of GMP equalisation would count as an accrual, which could invalidate the protection.

Someone with a fixed protection scheme could see their tax relief limit falling from £1.8m to £1.03m, leaving them with a 55 per cent tax charge on the difference, which would be a bill of £423,500.

Royal London director of policy, Steve Webb, believes that “urgent clarity was needed from HMRC” to ensure that savers are not caught out by the changes.

However, Royal London suggested that the government could already know that there is a potential issue, citing the Department for Work and Pensions (DWP) DB benefit simplification consultation paper published in December 2018.

In the paper, the DWP said: "We continue to work with HMRC to investigate whether changes might be necessary to tax legislation for those potentially negatively affected by GMP conversion as a result of benefit changes and corresponding lifetime tax allowance and/or annual allowance requirements.”

When asked by Webb whether 'fixed protection' schemes could cause a tax problem, HMRC responded by saying: “While we are considering any potential implications of GMP Equalisation, including on the LTA, it would not be appropriate at this point to confirm whether there is a potential issue. We will publish further information as soon as possible”.

Commenting, Webb said: ‘This issue combines two of the more complex areas of pensions – GMPs and pension tax relief limits. But that combination could result in a catastrophic tax bill for someone who had acted entirely in good faith. 

"It would be absurd and perverse if a small and unrequested pension boost in response to a court judgement meant that a scheme member suddenly faced a huge tax bill.  It is not good enough for HMRC and DWP to be discussing this issue and thinking about issuing guidance.  

"Taxpayers need to know where they stand as a matter of urgency."

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