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HMRC publishes
guidance; it is helpful, but more is needed

Our viewpoint

In my view the publication of guidance by HMRC on the pensions tax implications of some approaches to equalising for Guaranteed Minimum Pensions (GMPs) is helpful, but the pensions tax issues with using GMP conversion need to be resolved urgently to enable everyone to make real progress.

On Thursday 20 February HMRC published the first tranche of its long promised guidance on the pensions tax treatment of equalising for GMPs.

As expected, it relates primarily to the tax implications of the ‘dual record’ approaches. Further guidance on the treatment of lump sums and death benefits is promised by HMRC ’as soon as possible’. There is no comment on issuing guidance regarding GMP conversion. 

Background

The judgment in the Lloyds Banking Group case set out four potential approaches to equalise for GMPs: 

  • Three dual record approaches (labelled methods B, C1 and C2) which involve an annual comparison of the member’s and comparator’s pension; and 
  • A single record approach using GMP conversion (labelled method D2) that involves a one-off test followed by providing a new benefit that does not include a GMP. 

What does the guidance say?

The HMRC guidance confirms that, as anticipated, implementing equalisation of benefits earned between 17 May 1990 and 5 April 1997 for unequal GMP using any of the three dual record approaches should not normally have any unexpected pension tax implications for members. In particular, it should not usually trigger Annual Allowance (AA) usage or loss of AA deferred member carve out or loss of Fixed Protection Lifetime Allowance (LTA). 

However, HMRC's approach does create a burden on scheme administrators, who are required to rework historical LTA calculations for many pensioner members to reflect any increased pension. A practical and proportionate approach may be required in this area and we are working to ensure that this will be addressed in future guidance from the PASA chaired GMP Equalisation Working Group

What is the position on GMP conversion?

In October 2019 HMRC stated that there were ‘complexities’ in equalising using the single record method D2 and GMP conversion. The guidance goes further, confirming that “there may be consequences for some members” if conversion is applied, which for example “may result in either the loss of deferred members carve-out or fixed protection, or both”.

There is currently no indication of when or even if HMRC will be able to provide reassurance or solutions to issues such as these, just that they “continue to explore the tax implications”. 

What does this mean for pension schemes looking to equalise? 

The ruling in the Lloyds Banking Group case effectively stated that past underpayments to pensioners need to be calculated using one of the three dual record methods (even if a scheme chooses to follow the GMP conversion approach for future benefits). The HMRC guidance is therefore helpful in giving clarity on the pensions tax treatment of these arrears. Many pension schemes may now wish to begin the process of calculating comparator records and arrears payments. The guidance also provides the certainty required for schemes who wish to follow a dual-record approach for future benefits. 

The lack of progress regarding when and whether method D2 and GMP conversion is a viable option for equalising future benefits for all members is frustrating, and schemes wishing to follow this route for future benefits are likely to wish to continue to wait until there is further certainty on the tax implications before implementing method D2 and GMP conversion. 

Next steps

We are progressing the process of rectifying benefits in respect of the GMP reconciliation, generating comparator records and calculating arrears for equalisation for many of our clients. Gathering the necessary data and completing the calculations will take time. In the meantime it is essential that the pensions tax issues on GMP conversion are resolved urgently – next month’s budget would be an ideal opportunity to confirm that the issues will be addressed (including any necessary legislative change) so that everyone can move forward.

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