Sackers partner Claire Carey said that because the guidance makes clear that an increase to benefits solely for GMP equalisation purposes will not count as ‘benefit accrual’, and so should not result in the loss of fixed protection, those who enjoy fixed protection in respect of the LTA should see this as “good news”.
As good news stories go, the news that increases to the a defined benefit pension resulting from GMP equalisation will not affect lifetime protection – provided the pension came into payment prior to 6 April 2006, just went.
We’d wanted a knock out blow or a TKO to stop this 10 year old fight, instead we got another postponement with the real issues sidelined.
The guidance stops short of looking at some trickier areas, such as lump sum and death benefit payments. Crucially, it also fails to address the pensions tax implications of reshaping benefits as part of a GMP conversion exercise. As the legislation allowing GMP conversion has been in force since April 2009, and the government issued guidance back in April 2019 on using this facility for achieving equalisation, this is disappointing.
Last year’s Lloyds Bank ruling was supposed to have clarified matters so that GMP disputes could have been put to bed. Instead the complexities and uncertainties multiply and time drags on.
Having just witnessed one of the greatest moments of human endeavour in my lifetime, I ask the question “IF TYSON FURY DID GMP – WOULD THE TAX-ACCOUNTANSTS, LAWYERS AND ACTUARIES STILL BE ARGUING?”
For crying out loud – get on with it!
All the commentary on this arcane subject is the same. It welcomes progress only to tell us that progress is limited, that there are still no hard promises on when certainty can be reached and that there is still a world of pain ahead for schemes and their sponsors..
The HMRC’s long-awaited guidance will please the tax-accountants, lawyers and actuaries engaged in the various forms of benefits conversion , because it resolves little and gives yet more opportunities for valuable professional time to be wasted on an issue that should have been resolved more than ten years ago.
The result is money flowing from employers, through pensions into professional firms. The professional bills for dealing with GMP issues are paid from schemes struggling to remain solvent by employers whose productivity and strategy are impaired by pension costs.
It’s time we drained this particular swamp and refocussed all this professional attention on better things.
For those who need to know the details, here they are
I have highlighted areas which remain uncertain and emboldened time related uncertainties.
The main upshot is that all schemes , even schemes that have or don’t have to equalise (because they revalue all benefits at GMP rates) will have to check for Lifetime Allowance liabilities and make sure they know the totality of the potentially impacted member’s situation. As there is no way for one scheme to know the LTA situation of their post 2006 pensioners, they are going to have to find this out and trouble people who should be enjoying their retirement with weird tax stuff.
The upshot of all this nonsense will be adjustments to people’s taxation which will amount at most to a few pounds.
This isn’t going to fall into standard administration contracts (business as usual), this is going to mean not just legal and actuarial bills, but massive bill from administrators.
The gravy train rolls on
HMRC has published a newsletter,offering its views on the tax implications of GMP equalisation. The guidance covers all methods of equalisation, except conversion, which it promises to “continue to explore”. In addition, certain circumstances do not feature, eg the treatment of lump sum and death benefit payments. HMRC intends to provide guidance on these “as soon as possible”.
HMRC has confirmed that, as a general principle, increasing a pension solely to allow for GMP equalisation should be treated as an increase in the pension when the GMP itself was earned; HMRC warns the position could be different where the increase is more than this. HMRC then sets out how this general principle should be applied consistent with its existing guidance. It is helpful that the same guidance applies to all of the acceptable “dual record” methods identified in the Lloyds judgment.
Treating any increase in pension as having been earned before 1997 means there is no immediate impact on a member’s annual allowance (AA) calculation, hence no pension input. HMRC advises that the revised pension should be incorporated into the current and future years’ annual allowance calculation(s). Helpfully, HMRC has also confirmed that the “carve out” for deferred pensioners (ie so that the annual allowance does not need to be tested) will continue where it applies currently provided any changes to the pension relate solely to GMP equalisation.
There is no LTA impact in the simple case of someone who retired and brought all of their pension(s) into payment before 6 April 2006. However, the impact on a member’s LTA will need to be considered for any benefits brought into payment on or after this date. In these, cases, the increased pension will need to be used to update the LTA calculation for any retirement Benefit Commencement Event (“BCE2”) from that date. This will need to be built into GMP equalisation calculations and communicated to members in line with existing reporting procedures.
Tax charges will need to be paid where a member’s overall pension benefits are above their LTA, or go above their remaining LTA. Schemes will therefore need to work out any tax charge based on the change due to GMP equalisation in the member’s LTA position at the time they retired. Members will then need to check their position and sort out any tax that they now owe because they had a lower remaining LTA available for any benefits which came into payment at a later date.
Protections from the LTA (fixed, primary, individual and enhanced)
Any existing protections will be retained, again with the caveat that any adjustment is made solely for GMP equalisation purposes. Where an individual has primary or individual protection, they will need to notify HMRC of the corrected amount “without delay” (those who have Individual Protection 2016 can amend the figure online through their personal tax account).
Cash lump sums
Given that an adjustment for GMP equalisation will be considered as a correction to an existing entitlement, unless that adjustment is made within 12 months of the original BCE2, there would seem no opportunity for an additional pension commencement lump sum to be paid.
Tax treatment of back-payments
The HMRC guidance also explains the tax treatment of back-payments which will typically relate to several previous tax years. The guidance reflects existing HMRC practice in allowing members to spread the back-payment for tax purposes across the period to which it relates. In some case, schemes may need to provide a breakdown of the back-payment allocated to individual tax years and the interest included.
?The welcome clarity ?provided by this newsletter will allow schemes to move their GMP equalisation projects forward where they are planning to use one of the acceptable “dual record” methods identified in the Lloyds Judgment. However, they will need to make sure that any equalisation calculations collect the relevant information required for HMRC’s requirements both on implementation and for on-going administration.
Hopefully further guidance will follow ?”shortly”? from HMRC on small/trivial lump sums and death benefits, although it appears we will need to wait a little ?’longer”? for clarity where a scheme wishes to equalise using GMP conversion.
We are also expecting the cross-industry GMP Equalisation Working Group launched by the Pensions Administration Standards Association to produce its own guidance on tax issues, which we would expect will cover putting into practice those matters addressed in HMRC’s newsletter.