HMRC issues further guidance on GMP equalisation

HMRC has published further guidance on transfer value top-ups and GMP conversion for guaranteed minimum pension (GMP) equalisation.

In its GMP equalisation newsletter – April 2022, HMRC addressed issues around the pensions tax implications of equalising members' benefits.

On transfer value top-ups, HMRC confirmed that, provided the appropriate steps are taken, schemes can generally pay top-ups to the original receiving scheme or direct to the former member in cash, if the direct payment is less than £10,000, without unwelcome tax consequences.

“Lots of transfer value top-ups are small - typically only a few hundred pounds,” said LCP partner and head of GMP equalisation, Alasdair Mayes.

“Trying to arrange payment to the original receiving scheme risked costing more than the top-up was worth to the former member.

“HMRC’s confirmations on paying cash direct to the individuals make everything much easier. We have found it’s also popular with members.”

On GMP conversion, HMRC noted that there were likely to be impacts on the treatment of non-retired scheme members’ annual allowance in the tax year of conversion, as well as in all subsequent tax years to retirement.

It acknowledged that it needs to undertake further work in this area to determine the “appropriate outcome and treatment”, and the potential for any legislative change.

HMRC also clarified that although there may be pension tax consequences for non-pensioners, most members will not face tax issues in using GMP conversion to equalise benefits.

However, schemes looking to use the conversion method of equalising benefits were urged to consider the tax implications that may arise for deferred scheme members, as the effects of GMP conversion may cause the loss of fixed protection.

“GMP equalisation is a complex topic and guidance has been urgently needed to help pension trustees and sponsors navigate two really important pension tax issues; around transfer value top-ups and conversion,” Mayes commented.

“This guidance from HMRC is really valuable and will save trustees time and money.

“Trustees will be breathing a sigh of relief that HMRC agrees for most members there will not be adverse tax consequences in using GMP conversion to equalise for GMPs. This means that trustees won’t need to seek clearance from HMRC on a scheme-by-scheme basis, saving time and money.

“The fact that there can be pensions tax issues for some non-pensioners isn’t a surprise. These need to be addressed.

“What is great news is the suggestion that HMRC are considering the potential for legislative change to resolve the annual allowance issues that can arise. Rising inflation means these issues are becoming more and more significant. Let’s hope they can be resolved quickly.”

Aon head of GMP equalisation, Tom Yorath, stated that HMRC could have "gone further" on GMP conversion and the associated tax issues.

"GMP conversion tax issues arise as the current pensions tax framework does not cope well with changing a member’s pension benefits before they have reached retirement," he continued.

"Put simply, it’s the unhelpful consequence of the interaction between two complex areas.

“In our view, legislative change is needed to navigate a simple path through these issues. The challenge is that these are complex areas and there isn’t necessarily a straightforward fix that avoids further unintended consequences. To that end, HMRC is conducting further work to establish whether legislative change can happen.

“This doesn’t mean conversion is impossible – far from it. At present, we have more than 100 schemes looking at GMP conversion and the best progressed are using practical work-arounds to sidestep some of these issues. Indeed, we are almost four years after the Lloyds Judgment which required schemes to equalise - and most want to get on with fixing this problem now, rather than waiting for legislative change that may or may not come.”

Also commenting on the guidance, WTW senior actuarial consultant, Simon Pariser, said: “WTW welcomes HMRC’s latest ‘GMP Newsletter’. This provides helpful clarification on some of the key uncertainties around GMP conversion and resolving past transfer payments. There is more work to be done, and we hope HMRC addresses the remaining uncertainties in the same positive way.

“Trustees can move forward with GMP conversion exercises for pensioners and those members about to retire, confident in the tax consequences for individual members. HMRC’s willingness to consider legislative change for bulk exercises before retirement is also a big step in the right direction. That change now needs to happen quickly.

“Trustees want to implement the right GMP solutions for all of their scheme members and HMRC’s latest guidance, together with the GMP Conversion Bill, move them closer to being able to do so.

“Trustees now have a pragmatic way of addressing GMP equalisation for most members who have transferred out their benefits where a further transfer is impossible, impractical, or inefficient to arrange. We hope that HMRC’s further work on potential legislative change includes resolving the barrier to transfers made prior to April 2006.”

In the conclusion of the newsletter, HMRC stated that it would continue to work through the pension tax issues associated with the GMP conversion method with its industry working group, and would provide further updates in future newsletters.

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