HMRC guidance starts to address some key GMP equalisation tax issues

Our viewpoint

News Alert 2022/02

At a glance

HMRC has today issued important new guidance on some of the pensions tax issues that arise when undertaking GMP equalisation.  This will allow schemes to take further steps in their equalisation journey, subject to receiving and considering advice.

Key Actions

Scheme sponsors

  • Work with your trustees to consider if transfer top-ups can be paid in cash
  • Consider how much the prospect of legislative change on the adverse impacts of GMP conversion for post-5 April 2006 leavers increases the overall attractiveness of adopting GMP conversion as your equalisation method and impacts timing


  • Take stock of where unequal transfer payments sit in the scheme’s equalisation journey and take advice at the appropriate point on the implications for the scheme of HMRC’s guidance on such payments
  • If already committed to GMP conversion, take advice on the extent to which HMRC’s guidance resolves any technical issues.  If not already committed, continue to work through earlier-stage aspects of the GMP equalisation project

Scheme administrators

  • Note the various conditions that apply to making a top-up transfer and the types of authorised lump sum that can be used to pay cash and the circumstances in which they apply
  • If a conversion is taking place, identify those with vulnerable Lifetime Allowance protections and those with Pension Input Amounts triggered by the conversion

The Detail

On 6 April 2022 HMRC issued its third tranche of guidance on how pensions tax interacts with exercises to remove inequalities arising from GMPs (GMP equalisation). This follows two previous releases in 2020, the first principally covering implementing equalisation using a dual record method, for those who are already receiving pensions – including uplifting the rate in payment and paying arrears (see Pensions Bulletin 2020/08), and the second covering members who have received lump sums that need topping-up (see Pensions Bulletin 2020/30).

This latest guidance covers two new areas: solutions following unequalised transfer out, and – much awaited – GMP equalisation using GMP conversion.

Adjustments following unequalised transfers

Following the third Lloyds’ judgment handed down in November 2020 (see Pensions Bulletin 2020/48), trustees will have known they need to consider how to deal with cases where a transfer payment has previously been paid and is now identified as underpaid due to GMP equalisation concerns.  HMRC’s guidance provides reassurance that, in the context of such corrections:

  • Paying a top-up transfer payment to the original receiving scheme, or to another registered pension scheme (including a QROPS), will generally be an authorised payment (provided all the elements of a ‘recognised transfer’ are satisfied)
  • Paying a cash lump sum instead, directly to the former member (or in some cases estate or another individual on death) will be authorised, if it meets the conditions for an appropriate lump sum label when paid. This label might be:
    • a “relevant accretion” if the sum now due is no more than £10,000 and the original transfer was made after 5 April 2006 (with the guidance allaying concerns that had arisen about deadlines for this, saying that the six-month period for making the payment starts from when entitlement to a top-up has been established, quantified and relevant information obtained from the former member)
    • as a “small lump sum” (of up to £10,000) – provided certain conditions are met, including that the former member has attained Normal Minimum Pension Age; or
    • as a winding up lump sum (of up to £18,000) where the scheme itself is winding up

The guidance also gives some information about the taxation of such lump sums.  It also provides reassurance about possible annual allowance implications where either a top-up transfer payment or a lump sum is paid.  These two forms of settlement of the underpaid benefit should also not impact protected pension ages in the receiving scheme or a right to lump sum which exceeds 25% of uncrystallised rights.

However, the guidance warns that there might be cases where a top-up transfer payment causes loss of fixed and enhanced protections.  We expect this risk to principally arise in the rare case of the top-up transfer resulting in additional defined benefits being granted in the receiving scheme outside a wind-up situation, but legal advice would need to be taken.

The guidance makes no distinction between statutory and non-statutory transfers, but only relates to cases where it has been determined that the former member has a right to a top-up transfer payment.  Creating such a right, if it was determined it did not already exist, could have pensions tax consequences beyond the scope of the guidance.

Our viewpoint

Many schemes will want to go down the cash lump sum route as it is much easier and less costly than paying a top-up transfer.  The £10,000 limits for ongoing schemes and the £18,000 limit for those in wind up should cover many top-up payments.  However, whether to go down the top-up transfer or lump sum route and for whom will be subject to a number of special considerations and so trustees will need to take advice before settling their approach.

For the top-up transfer route some important non-tax issues will need to be addressed, including the advice requirements for sums over £30,000.

If either route follows non-statutory transfers care may be required to avoid triggering unintended pensions tax consequences.

Using conversion

Trustees have been waiting for some while to hear from HMRC about the pensions tax implications from using DWP’s GMP conversion methodology.  This April 2022 guidance, heralded by the Government at the Second Reading of the Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill in the House of Lords on 25 March 2022 (see Pensions Bulletin 2022/12) is the first substantial guidance from HMRC on using GMP conversion.  It is set specifically in the context where:

  • The conversion is “on an actuarial equivalence basis only” – by which HMRC goes on to explain it means “post conversion benefits have the same or virtually the same actuarial value as the pre conversion benefits”
  • The conversion for a member is due to GMP equalisation – which HMRC goes on to explain as meaning that “the conversion is on the basis of seeking to achieve both equality of present value on the conversion date and equality of benefit payments thereafter between men and women for benefits earned from 17 May 1990”

Members yet to retire

HMRC acknowledges that pensions tax rules particularly impact conversion for members who have not yet retired.  For example, a deferred member who might normally not use any annual allowance in the arrangement because they benefit from the deferred member carve out (DMCO), could, as a result of ‘GMP ceasing to be GMP’, see annual allowance usage for the year of conversion and thereafter.  Also, those with fixed protection could lose it.  The good news is that there is a strong hint that HMRC is looking at “potential for legislative change” to provide an appropriate outcome on the annual allowance.  This is much needed due to the technical workings of the annual allowance in inflationary times.  

The guidance also gives reassurance that for deferred pensioners who left before A-day, and therefore are usually outside the annual allowance regime, conversion as described above will not cause them to come into it.

Pensioner members

The rest of the guidance gives helpful reassurance on technical points for those who are already pensioners at conversion.  These include the following:

  • Annual allowance – conversion after the tax year of retirement will not generate a pension input amount
  • DMCO – conversion of crystallised benefits in the tax year of retirement does not affect the assessment of whether the DMCO applies to the member in that tax year
  • Fixed protection – conversion any time after retirement will not trigger its loss if all benefits in the arrangement have been crystallised
  • Lifetime allowance – whilst conversion after retirement could result in a benefit crystallisation event (BCE3), it would depend on the extent of any immediate jump in the conversion pension being paid relative to a dual record equalisation method applied by the scheme to calculate any arrears due and any restatement of past lifetime allowance usage

HMRC ends its guidance with a statement that it continues to work, with its Industry Working Group, through the pension tax issues associated with the GMP conversion method and promises to provide further updates in future pension schemes newsletters.

Our viewpoint

The GMP conversion part of the guidance is very welcome, and is consistent with the pensions tax aspects discussed in the conversion guidance issued last year by PASA (see Pensions Bulletin 2021/29).  However, there is clearly more work to be done.  One of these is in addressing the unintuitive and disproportionate annual allowance issues potentially arising when converting deferred pensioners who left after A-day. 

But the fact that this is just the beginning of substantive tax guidance on GMP conversion and some of the issues identified could be resolved through further work, potentially including changes to tax legislation, suggests that schemes without a pressing deadline to complete their GMP conversion might want to wait and see what, if anything, HMRC comes up with before pressing ahead.

For others it reinforces our previous messages that there is a lot to do on GMP equalisation, but there is no need to decide on the equalisation method for future payments until earlier stages are completed, by which time some of the uncertainties, whether on the HMRC or DWP side will hopefully be clarified.

This News Alert does not constitute advice, nor should it be taken as an authoritative statement of the law. If you would like any assistance or further information on the issues raised, please contact the partner who normally advises you at LCP via telephone on +44 (0)20 7439 2266 or by email to

Pension Schemes Act

Pension Schemes Act

Insight hub

Keep up-to-date with the Pension Schemes Act and TPR's funding consultation. What does this mean for sponsors and trustees?

Enter the hub