Her Majesty’s Revenue & Customs (“HMRC”) has published guidance regarding the tax treatment of additional benefits granted to pension scheme members when schemes equalise for the effect of unequal (between men and women) Guaranteed Minimum Pensions (“GMP”).
The guidance was updated in July 2020, to cover the treatment of lump sum and death benefit payments but still does not deal with GMP conversion. Further guidance on this is expected in due course.
Annual Allowance and Protection from Lifetime Allowance charge
HMRC notes that, as GMP equalisation relates to benefits that accrued between 17 May 1990 and 5 April 1997, any additional benefits that become payable as a consequence will not count as new benefit accrual, so do not have to be tested against the annual allowance and will not invalidate any lifetime allowance protections. The guidance notes, however, that, if the additional benefit includes any other adjustment (rather than purely for equalisation) Fixed Protection (including 2014 and 2016 Fixed Protection) could be lost.
Scheme members with Primary or Individual Protection should inform HMRC of the amended value of their protected benefits, taking account of GMP equalisation.
Lifetime Allowance charge
Additional benefits arising from GMP equalisation will result in an increase in the value of an individual’s benefits which may mean that the individual would qualify for protection from the lifetime allowance charge (but would not have done without such additional benefits). In such a case the individual can approach HMRC with evidence to support late notification.
For a member who takes his benefits after GMP equalisation, the value of the equalised benefit will be tested against the lifetime allowance when he takes his benefits or reaches age 75. For a member who has already crystallised his benefits prior to equalisation, the test carried out at crystallisation will have to be corrected to include the additional benefits. This may result in an individual becoming liable for a lifetime allowance charge (or an increase to a charge paid previously).
Backpayments
Schemes may pay backpayments to members as a lump sum as part of the GMP equalisation exercise. The scheme is required to operate PAYE on the lump sum as though it were all income relating to the tax year in which it is paid. However, the amount of tax actually due is calculated on the accruals basis, taking account of the years to which the backpayment relates. Members can contact HMRC to claim the correct tax treatment.
Lump sums
Certain lump sums can be paid only if they extinguish all of a member’s rights under a scheme; these include trivial commutation and “small lump sums”. HMRC has confirmed that the requirement should be read as extinguishing all the rights that could reasonably have been known about at the time, so such sums paid in the past will not become unauthorised as a result of GMP equalisation. For some of these lump sums there is a limit on the amount of the lump sum and, again, HMRC has confirmed that an increase arising from GMP equalisation will not cause the payment to become unauthorised, even if the additional payment results in the total exceeding the limit.
However, the limit on trivial commutation lump sums is based on the value of a member’s benefits across all registered pension schemes, on an HMRC-specified basis, on a date nominated by the member. If GMP equalisation results in that value exceeding the relevant limit the payment of a trivial commutation lump sum will be deemed to be an unauthorised payment. However, trustees may find it difficult to establish the correct position, given the potential need to look at the value of the members’ benefits from a number of different schemes – information that may not still be available.
Top-ups to lump sums paid previously can be authorised payments if they satisfy the payment conditions at the time they are paid. A top-up to a trivial commutation lump sum will not satisfy those conditions but may qualify as a “small lump sum”.
Pension commencement lump sums (PCLS) and trivial commutation lump sums have to be paid to the member. Therefore, no top-up to a previous PCLS or trivial commutation lump sum may be paid if the member has died. In addition, where a member became entitled to his pension more than 12 months ago, the scheme cannot pay a further PCLS.