HMRC has published an update on guaranteed minimum pension (GMP) equalisation that addresses the tax issues around lump sum payments to affected members.

Although it provided some clarity and may pave the way for a resumption of top-up lump sum payments, it stated that HMRC was unable to provide guidance on GMP conversion as “more detailed work needs to be done”.

HMRC was criticised for its failure to provide guidance on GMP conversion, with Barnett Waddingham principal and head of GMP equalisation, John Cormell, saying it “failed to grasp the nettle” on GMP conversion.

“This is a missed opportunity to help facilitate what could be the best option for many pension schemes, and whilst conversion is still possible within the existing legal and tax framework, careful navigation will be needed to steer through the obstacles should trustees and employers still want to pursue the conversion route,” he added.

LCP partner and head of GMP equalisation, Alasdair Mayes, said it was “gravely disappointing” that HMRC was not able to publish guidance on the tax implication of using GMP conversion to equalise benefits after a year’s work.

“Many pension schemes intend to use GMP conversion, as promoted by the Department for Work and Pensions (DWP),” he continued.

“It would have been really helpful if HMRC could have confirmed the tax treatment, as DWP said they would back in April 2019.”

HMRC’s update stipulates that for most types of lump sum, where an unequalised lump sum was paid out previously, pension trustees will have a route to pay a top-up to members to equalise the lump sum without tax consequences.

However, in some ‘trivial communications lump sum’ payments, the need to equalise could trigger an additional tax charge.

Commenting on the update, 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 is 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, said that the guidance provided some “long awaited clarity” on addressing 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,” he added.

“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.”

Yorath noted that trustees paying top-ups to members that took a trivial commutation lump sum may find it pushed members over the triviality thresholds, meaning the member should never have received the 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,” he added.

Share Story: