On 20 February 2020, HMRC published its first guidance on the tax treatment of adjustments made to pension scheme benefits to comply with the requirement to equalise GMPs following the Lloyds judgment handed down in October 2018.
Many trustees and employers have paused their GMP equalisation projects while waiting for HMRC guidance: this guidance may allow those projects to progress, but if trustees and employers were considering GMP conversion their wait is not over as this guidance specifically carves out the tax treatment if the conversion methodology is adopted.
The guidance provides some reassurance on the approach which HMRC will take to benefit increases made to equalise GMP (other than under the conversion methodology), but its scope is limited and additional guidance is promised to answer other outstanding questions.
The guidance provides the following helpful clarifications:
- Any increases to pensions due at retirement as a result of GMP equalisation will not count as a new entitlement, since the increases relate to membership of a pension scheme between 17 May 1990 and 5 April 1997. Generally, therefore, such increases will not count as new accrual of benefit.
- Annual allowance : There should be no impact on the existing carve-outs for deferred members, and no need to revisit historic pension input amount calculations in respect of active members and those deferred members who are not covered by the carve-outs.
- Lifetime allowance : Fixed protection, primary protection and individual protections should not be lost where an increase is made to an individual's pension solely for GMP equalisation. The same applies for individuals with enhanced protection who have been deferred since before 6 April 2006. However, there are two caveats:
- If an increase is a mixture of GMP equalisation and other adjustments, the protection may be lost; and
- For individuals with enhanced protection who became deferred members after 5 April 2006, GMP equalisation adjustments may result in relevant benefit accrual, which would mean the loss of enhanced protection.
- Benefit crystallisation events will need to be revisited, as corrections may be needed. This could result in a lifetime allowance charge becoming due. The guidance recommends that scheme administrators consider what process is appropriate to adopt in order to identify whether GMP equalisation adjustments to members' benefits are likely to result in a lifetime allowance charge becoming payable. Scheme administrators are jointly and severally liable (with the member) for any lifetime allowance charge that arises, so they must ensure that mechanisms are in place to avoid a failure to pay a charge.
HMRC has promised additional guidance "as soon as possible" on other issues including the treatment of lump sum and death benefit payments, as well as the tax implications of GMP conversion. We are also expecting guidance from the DWP on the conversion methodology. In the meantime, please get in touch with your usual Womble Bond Dickinson pension team contact or Naomi Jacques if you would like any further information on GMP equalisation.