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Article | Benefits Hot Topics

Further HMRC guidance on GMP equalisation

Retirement|Pension Board and Trustee Consulting

July 16, 2020

HMRC’s latest newsletter provides guidance on the tax treatment on applying GMP equalisation to lump sum payments and confirms that the guidance does not apply to GMP conversion.

HMRC’s latest newsletter sets out the tax treatment where GMP equalisation means that further payments are due where benefits have been paid as a lump sum. GMP conversion is mentioned in the newsletter but no guidance is provided.

Tax treatment of GMP equalisation uplifts where a member’s benefits have previously been commuted in full

As well as trivial commutation and small lump sums, the update covers lump sums paid where a member retired on the grounds of serious ill health and lump sums paid as a part of a winding up.

The latest guidance confirms that, if schemes make further payments to the member “solely for GMP equalisation”, it can be paid as a small lump sum. This is provided that the payment is no more than £10,000 (including any interest), which is likely to be the case in most instances. The scheme rules must permit such payments, which would be subject to income tax in the normal way.

Because of the exceptional circumstances surrounding GMP equalisation, the effect of HMRC’s guidance is that, until the trustees have decided how to equalise benefits, payments that continue to be made on an unequalised basis will not be treated as failing to meet the requirement that the payment extinguishes all benefits. This will allow those schemes that have put commutation payments on hold to reintroduce most payments if they now wish to do so.

Similar principles apply to benefits payable to dependants on grounds of triviality or because the scheme was winding up, albeit that the limit on payment of further benefits is £30,000 and £18,000 respectively.

However, consistent with their earlier guidance, HMRC has confirmed that any additional benefits arising from GMP equalisation should be treated as having been earned when the member earned the GMP in the first place, so they would be part of the member’s benefits at the time these were commuted. This could mean that some historic trivial commutation payments are now treated as unauthorised benefits leading to tax charges on the member and the scheme.

This is because, unlike other commutations, the trivial commutation rules are based on limits regarding the amount of the member’s pension instead of the amount of the original payment. As a result of equalising GMP rights, the amount of the member’s benefits might be increased above this limit. This means that, what was thought at the time to have been an authorised payment, will prove not to have been so. This is a complicated area (not least because HMRC’s trivial commutation rules have changed several times since 1990!), and trustees are likely to want to discuss this with their advisors before taking any action.

Tax treatment of other lump sum benefits

The guidance confirms that a PCLS can be paid in stages, but no further PCLS can be paid if the member became entitled to their scheme pension more than 12 months ago.

Additional defined benefits lump sum death benefit payments can be made, but they are likely to be taxed.

GMP conversion

The update also confirms that HMRC is unable to provide supplementary guidance on conversion, as they need to complete more detailed work. It identifies a number of areas that may potentially be affected and suggests that any schemes wishing to use GMP conversion should seek advice on the tax implications of doing so.

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