Rising inflation could ‘put the brakes’ on GMP conversion exercises

A combination of pension tax rules and rising inflation could “put the brakes” on guaranteed minimum pension (GMP) conversion exercises, according to LCP.

As MP Margaret Ferrier’s Private Member’s Bill on simplifying the GMP conversion process makes its way through parliament, LCP warned that there were some ‘snags’ in the pension tax rules that still need to be resolved and could cause spiralling costs.

The consultancy noted that although using GMP conversion was a useful tool, it can cause the loss of certain individual member protections against Lifetime Allowance tax charges and in some cases trigger Annual Allowance tax charges.

LCP urged pension schemes with GMP conversion exercises in progress to aim to complete them before the new tax year to avoid more members being impacted, warning that a spike in inflation could put a short-term brake on conversions.

“It’s good news that the bill aiming to bring clarity to issues around GMP conversion is progressing through parliament, however there are issues that trustees need to be aware of,” said LCP partner and head of GMP equalisation, Alasdair Mayes.

“GMP conversion can, with the law as it stands, trigger penal tax charges on some individual members. This risk is much higher in times of rising inflation and there is a step change in impact each 6 April.

“With inflation really taking off with both the energy crisis and war in Ukraine, trustees with a GMP conversion already in progress should aim to complete it before the new tax year, otherwise their members are much more likely to suffer a tax hit. We may see that spiralling inflation puts the brakes on conversion exercises.

“The good news is that the government appear to be alive to this issue and in a recent letter to his Labour counterpart, Guy Opperman has said the DWP will be ‘working closely with HMRC’. Let’s hope this means that in future years there isn’t this sort of cliff edge issue.”

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