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New HMRC guidance on GMP equalisation will save trustees ‘time and money’

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Transfer top-ups and GMP conversion 

Today HMRC has published more guidance on the pensions tax implications of equalising member benefits for Guaranteed Minimum Pensions (“GMPs”).  The guidance covers two topics, top-ups to past transfers and using GMP conversion to equalise benefits. 

Transfer value top-ups 

Following the third judgment in the Lloyds Banking Group case, trustees have an obligation to pay a top-up to former members who transferred out of their scheme if they were underpaid because the transfer paid did not allow for equalisation of their benefits for GMPs.  This applies to transfers going all the way back to 1990. 

The HMRC guidance confirms that, provided they take the appropriate steps, schemes can normally pay top-ups to the original receiving scheme or even direct to the former member in cash, without unwelcome tax consequences.  

GMP Conversion 

Many pension trustees and sponsors are keen to use GMP conversion to achieve GMP equalisation for those still members of their schemes.  It has the potential to deliver simplification rather than adding further complexity. A Bill is currently making its way through the Houses of Parliament to clarify the DWP legislation.  The other key area on which clarification was sought is the pensions tax implications for members. 

The HMRC guidance clarifies some key points and raises the prospect that there might be legislative change to resolve some of the adverse tax consequences of GMP conversion. 

Alasdair Mayes, Partner and Head of GMP Equalisation at LCP said: “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.  This guidance from HMRC is really valuable and will save trustees time and money."

On transfer top-ups Alasdair said: 

“Lots of transfer value top-ups are small - typically only a few hundred pounds.  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 conversion, Alasdair went on to say: 

“There had been fears HMRC would never issue guidance on GMP conversion.  That’s in part what led me to put together the PASA guidance. 

“Trustees will be breathing a sigh of relief that HMRC agree 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.” 

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