HMRC releases GMP tax guidance; industry warns ‘unanswered questions’ remain

HMRC has released a statement issuing guidance on the tax issues brought about by guaranteed minimum pension (GMP) equalisation.

The advice covers issues surrounding the annual allowance, namely the deferred member carve-out, and the lifetime allowance, including fixed protection, enhanced protection and late claims for lifetime allowance protection.

It stated: “This guidance relates to benefit adjustments where the reason for the adjustment is solely for GMP equalisation and does not cover other benefit adjustments, if any, which occur at the same time.”

Although the guidance was welcomed by much of the pensions industry, some warned that the advice leaves some questions “unanswered”.

LCP partner, Steve Webb, commented: “Today’s announcement from HMRC is good news but still leaves important questions unanswered.

“It means in particular that people who had benefited from fixed protection of their lifetime allowance should not lose that protection if their scheme is tackling the GMP equalisation issue in one of a set of ways known as the ‘dual records’ methods.

“But for schemes considering tackling this issue through GMP ‘conversion’ there is still no clarity about the position of members on protection or other wider pensions tax concerns.

“Although these are complex issues, we do need HMRC to provide reassurance or solutions as soon as possible, not least because resolving this issue could help schemes in other ways, including moving ahead with plans to buy out liabilities.”

Aon partner and head of GMP equalisation, Tom Yorath, agreed, saying that although HMRC had dealt with some of the more “straightforward issues” that will let schemes “press forward with equalisation with confidence”, it had “not yet addressed some of the bigger challenges for schemes that want to do away with GMPs forever through GMP conversion”.

He continued: “For members who have yet to retire, HMRC has taken a relatively pragmatic view meaning that members should not lose transitional tax protections that they’ve applied for – and, in the main, these members will not have to revisit past tax disclosures.

“For members who have retired, the position is more complex. There will be a small subset of members for whom extra tax may be payable. These members will typically be those who have already paid a lifetime allowance charge when they retired.

“Admittedly, this is a small set of members, and revisiting these tax charges is a fiddly process. Many schemes will be concerned about the proportionality of building a relatively complex administration process - and performing recalculations for a large number of members - to deal with relatively small charges for a handful of people.”

The statement from HMRC noted that it will continue to explore pension tax issues associated with GMP equalization with working groups and aims to give more guidance as soon as possible.

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