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HMRC guidance on GMP equalisation

Retirement
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February 21, 2020

HMRC has issued the first part of its guidance on the tax implications of GMP equalisation.

HMRC has published a newsletter, offering its views on the tax implications of GMP equalisation. The guidance covers all methods of equalisation, except conversion, which it promises to “continue to explore”. In addition, certain circumstances do not feature, eg the treatment of lump sum and death benefit payments. HMRC intends to provide guidance on these “as soon as possible”.

HMRC has confirmed that, as a general principle, increasing a pension solely to allow for GMP equalisation should be treated as an increase in the pension when the GMP itself was earned; HMRC warns the position could be different where the increase is more than this. HMRC then sets out how this general principle should be applied consistent with its existing guidance. It is helpful that the same guidance applies to all of the acceptable “dual record” methods identified in the Lloyds judgment.

Annual allowance

Treating any increase in pension as having been earned before 1997 means there is no immediate impact on a member’s annual allowance (AA) calculation, hence no pension input. HMRC advises that the revised pension should be incorporated into the current and future years’ annual allowance calculation(s). Helpfully, HMRC has also confirmed that the “carve out” for deferred pensioners (ie so that the annual allowance does not need to be tested) will continue where it applies currently provided any changes to the pension relate solely to GMP equalisation.

Lifetime allowance (LTA)

There is no LTA impact in the simple case of someone who retired and brought all of their pension(s) into payment before 6 April 2006. However, the impact on a member’s LTA will need to be considered for any benefits brought into payment on or after this date. In these, cases, the increased pension will need to be used to update the LTA calculation for any retirement Benefit Commencement Event (“BCE2”) from that date. This will need to be built into GMP equalisation calculations and communicated to members in line with existing reporting procedures.

Tax charges will need to be paid where a member’s overall pension benefits are above their LTA, or go above their remaining LTA. Schemes will therefore need to work out any tax charge based on the change due to GMP equalisation in the member’s LTA position at the time they retired. Members will then need to check their position and sort out any tax that they now owe because they had a lower remaining LTA available for any benefits which came into payment at a later date.

Protections from the LTA (fixed, primary, individual and enhanced)

Any existing protections will be retained, again with the caveat that any adjustment is made solely for GMP equalisation purposes. Where an individual has primary or individual protection, they will need to notify HMRC of the corrected amount “without delay” (those who have Individual Protection 2016 can amend the figure online through their personal tax account).

Cash lump sums

Given that an adjustment for GMP equalisation will be considered as a correction to an existing entitlement, unless that adjustment is made within 12 months of the original BCE2, there would seem no opportunity for an additional pension commencement lump sum to be paid.

Tax treatment of back-payments

The HMRC guidance also explains the tax treatment of back-payments which will typically relate to several previous tax years. The guidance reflects existing HMRC practice in allowing members to spread the back-payment for tax purposes across the period to which it relates. In some case, schemes may need to provide a breakdown of the back-payment allocated to individual tax years and the interest included.

What next?

The welcome clarity provided by this newsletter will allow schemes to move their GMP equalisation projects forward where they are planning to use one of the acceptable “dual record” methods identified in the Lloyds Judgment. However, they will need to make sure that any equalisation calculations collect the relevant information required for HMRC’s requirements both on implementation and for on-going administration.

Hopefully further guidance will follow shortly from HMRC on small/trivial lump sums and death benefits, although it appears we will need to wait a little longer for clarity where a scheme wishes to equalise using GMP conversion.

We are also expecting the cross-industry GMP Equalisation Working Group launched by the Pensions Administration Standards Association to produce its own guidance on tax issues, which we would expect will cover putting into practice those matters addressed in HMRC’s newsletter.

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