HMRC issues updated tax guidance for GMP equalisation

The tax office's July GMP equalisation newsletter notes that for most types of lump sum benefit, where an unequalised lump sum has been paid in the past, trustees will have a route to pay a top-up to members without consequence.

The guidance states: "Where benefits have previously been paid, depending on the circumstance, a further lump sum payment may be an authorised payment. Any payment, including ‘top-up' payments to previous lump sums, must satisfy the payment conditions in force at the time the payment is made."

However, the newsletter adds that the situation "is different for a trivial commutations lump sum payment", where a need to equalise could trigger an additional tax charge for some individuals and schemes.

Lane Clark & Peacock partner and head of GMP equalisation Alasdair Mayes said: "It's great news that trustees will, in many cases, have a clear route through tax rules to equalise past lump sum payments where needed - this is welcome flexibility from HMRC. It's unfortunate, but not surprising, that some cases could in theory trigger an additional tax charge.

"There was a fear that the need to equalise lump sums paid in the past could make the original payment unauthorised, triggering penal tax charges on lots of individuals with small pension benefits. This guidance limits that risk to a very narrow set of circumstances, which is good news but not the panacea some hoped for."

Aon partner and head of GMP equalisation Tom Yorath added: "Today's guidance from HMRC provides long awaited clarity on dealing with lump sum benefits. Since the Lloyds Judgment, many schemes have been afraid of triggering a host of adverse tax consequences by continuing to offer lump sum benefits to members with de minimis levels of pension.

"This guidance turns the taps back on and provides a pragmatic way forward, particularly for schemes where there is a strong demand from members to take small benefits as lump sums."

He continued: "Helpfully, HMRC has also come to the aid of schemes that paid lump sum benefits shortly after the judgment and who may have been concerned that they'd fallen foul of tax rules. HMRC has said that the date that matters to them for tax purposes, is the date that schemes choose the method of equalising benefits for their members.

"In my experience, this isn't clear cut for many schemes, as they may be taking different decisions for different populations at different times. Schemes will need to work with their advisers to see whether they have gone past this date or not."

Challenges remain

Yorath stated: "Some practical challenges remain for members who took a trivial commutation lump sum, as benefits need to be considered across all schemes. Trustees paying top-ups to these members may find that this pushes the member over triviality thresholds. This would mean the member should never have received a lump sum in the first place.

"Working through this is likely to be a big challenge, as trustees and administrators may not now have access to information about members' benefits held in other schemes."

HMRC also stated it is unable to provide guidance on conversion yet, as more detailed work needs to be done on the wider issues associated with that methodology.

It said: "The position regarding conversion is complex and its effects within the pension tax rules may have wider impacts… Any schemes wishing to use the conversion method should consider any tax implications that may arise in accordance with the existing legislation."

Mayes said: "It's gravely disappointing that HMRC are not able, after more than a year's work, to publish guidance on the pension tax implications of using GMP conversion to equalise benefits. Many pension schemes intend to use GMP conversion, as promoted by the Department of Work and Pensions (DWP). It would have been really helpful if HMRC could have confirmed the tax treatment, as the DWP said they would back in April 2019."

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