GMP equalisation - some clarity on tax issues?

HMRC has published its Guaranteed Minimum Pension ("GMP") equalisation newsletter ( "the newsletter") setting out guidance on certain tax issues arising when equalising benefits.

What does the newsletter say?

Pension scheme trustees and employers have known for some time that they will have to equalise GMPs using one of several available methodologies . However, there has been considerable industry uncertainty around, for example, tax issues arising from the equalisation process. 

HMRC's guidance "relates to those equalisation methods whereby a dual record keeping approach is used but does not apply where a conversion method is applied…a method that converts scheme benefits into a new form of benefit". 

Broadly, the dual record keeping approach involves a year-by-year equalisation approach, whereas the conversion method is a one-off conversion of the GMP benefit into a non-GMP benefit. The conversion approach may be the preferred method because it does not require any on-going administration by the scheme.

The starting point

Equalising GMPs may give rise to members receiving increased benefits. In turn, there may be tax considerations for members in relation to their annual allowance and lifetime allowance, and any pensions tax protection which they may have (including fixed, primary, individual and enhanced protection).

The newsletter addresses some of these tax issues in relation to the dual record keeping approach.

It says that any increase to the pension at retirement because of GMP equalisation will not be regarded as a new entitlement, and will not (on its own) constitute a new accrual of benefit that will need to be tested against the annual allowance or that will adversely affect applicable lifetime allowance protections. However, there may be an impact on the amount of any previous and future benefit crystallisation events ("BCEs").

The annual allowance

The newsletter deals with the tax position of individuals who became deferred members before 6 April 2006 and those covered by the annual allowance deferred member carve-out. Provided these deferred members meet the criteria in the newsletter, their current position should not be affected.

For other deferred and active members there will be no need to reconsider pension input amount calculations. However, such calculations in the tax year of implementing GMP equalisation and thereafter will need to take into account the revised amount of the benefit entitlement in the opening and closing benefit calculations.

Tax protections

Individuals with fixed protection should keep that protection, unless the increase is a mixture of GMP equalisation and other adjustments, which may lead to fixed protection being lost.

Individuals with primary and individual protections may find that the value of their rights protected is higher than originally notified to HMRC. They must notify HMRC "without undue delay". 

Individuals lose enhanced protection where they have "relevant benefit accrual". For members deferred prior to 6 April 2006, any adjustment should not affect their enhanced protection. However, other deferred members may be affected. 

Individuals who qualify for protection from the lifetime allowance charge because GMP equalisation benefit adjustments increase their benefits should contact HMRC with evidence to support their late notification. HMRC will then consider certain criteria depending on the protection being sought. 

Adjustments for GMP equalisation that increase the starting amount of pension will increase the BCE 2 (which occurs when a member becomes entitled to the payment of a scheme pension under a registered pension scheme before the age of 75) and BCE 5 (which occurs when a member reaches their 75th birthday under a defined benefit arrangement without having drawn all of their entitlement to a scheme pension and/or lump sum). Where any increase affects pensioner members, the guidance sets out the corrections which may be required and any consequent tax implications.

Paying the lifetime allowance charge

The newsletter signposts where HMRC guidance can be found on certain topics, such as who is liable for the lifetime allowance charge, and how the liability to pay the charge can be discharged. Issues such as the operation of PAYE on arrears of pension paid as a lump sum as part of the GMP equalisation exercise are also addressed.

What does the newsletter not say?

Unfortunately, the newsletter does not provide the full picture on GMP equalisation. More guidance is expected to follow on the treatment of lump sum and death benefit payments as well as the tax implications for pension schemes who choose to use the conversion methodology. However, it is not clear when this supplementary guidance will be published.

Further information

Please contact us if you would like further information on any of the issues raised.