HM Revenue & Customs (HMRC) has launched a consultation on draft regulations designed to prevent pension scheme members from facing unexpected annual allowance tax charges as a result of guaranteed minimum pension (GMP) equalisation exercises.

The consultation, which closes on 13 July 2026, seeks views on draft secondary legislation that would amend the Finance Act 2004 to maintain existing annual allowance protections following GMP conversion.

The proposals address concerns that some deferred members could lose their Deferred Member Carve-Out (DMCO) protection when schemes use the Department for Work and Pensions' (DWP) statutory GMP conversion method to equalise benefits between men and women.

Under current rules, GMP conversion can increase the value of pension benefits for annual allowance purposes, potentially triggering unexpected tax charges for affected members.

HMRC said the changes would ensure that where GMP conversion is carried out, any increase in pension rights attributable to the conversion, or to the rectification of sex-based inequalities linked to GMPs, would be disregarded when calculating pension input amounts for annual allowance purposes.

The draft legislation would apply to both defined benefit and cash balance arrangements, with amendments proposed to sections 230 and 234 of the Finance Act 2004.

According to HMRC, the measures are intended to ensure that deferred members who would have qualified for DMCO protection continue to benefit from it after GMP conversion, regardless of the equalisation method used.

As a result, members should not face a worse tax outcome simply because a scheme has chosen to equalise benefits through GMP conversion.

The regulations would apply from the 2027/28 tax year onwards.

The consultation comes as schemes continue to progress GMP equalisation projects following a series of court rulings and subsequent industry guidance.

In recent years, industry bodies and advisers have repeatedly highlighted the need for legislative changes to address unintended tax consequences arising from GMP equalisation and conversion exercises.

The explanatory note accompanying the draft regulations states that increases in pension rights resulting from GMP conversion would be disregarded when calculating pension input amounts, provided the conversion is undertaken to rectify sex discrimination and is not part of a tax avoidance arrangement.

“GMP conversion is a valuable tool for trustees to deliver GMP equalisation for members, but the risk of pensions tax charges has been delaying equalisation for non-pensioners," commented LCP partner, Alasdair Mayes.

“It’s great news that HMRC have brought forward draft regulations seeking to avoid the unintended annual allowance issues. A solution is particularly important in current times, with volatile inflation, which can trigger unintended tax charges on members.

“Unfortunately, despite being four years in the making, the draft regulations published today appear to be drafted too narrowly to solve the issue.

"The proposed 'carve out' only appears to cover removing the GMP rules from a pension scheme. Related benefit changes the trustees consider necessary or desirable to facilitate removal of the GMP rules do not appear to be covered.

"Such benefit changes are necessary to avoid significant reductions in the pension payable to members at retirement – something trustees following the DWP and PASA guidance seek to avoid.

“Hopefully these issues can be addressed as part of the consultation process, so conversion can be used to deliver equality with minimum interference.”

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