GMP equalisation: HMRC guidance on (some) tax aspects

What isn’t covered?

HMRC’s guidance relates to GMP equalisation adjustments only, not to other adjustments even if they are made at the same time – so it’s important to remember that in cases where a GMP equalisation adjustment does not have tax implications, a more general adjustment might. The guidance does not apply where a conversion method is used to achieve equalisation, and HMRC has flagged that equalising via conversion could result in loss of the deferred member carve-out or loss of fixed protection. Further guidance on the tax implications of conversion, and on the (arguably much trickier) area of the tax treatment of lump sum and death benefit payments will follow as soon as possible.

Key points in the guidance

The general principle is that an increase in benefits resulting from membership of a pension scheme between 17 May 1990 and 5 April 1997 does not, on its own, constitute new accrual for annual allowance (AA) or lifetime allowance (LTA) purposes. However, an adjustment may have an impact on previous and future benefit crystallisation events.

Annual allowance issues

On the basis of that general principle, pre-6 April 2006 deferred members will remain outside the AA provisions. Members who are covered by the deferred member carve-out should not be affected, since the legislation includes the adjustment within the statutory increase percentage for the purposes of the carve-out.

For other deferred and active members, HMRC has confirmed that there is no need to revisit pension input amount calculations for past years. In the year in which equalisation adjustments are implemented in the scheme (and future years), pension input amount calculations will need to take the revised amount into account.

Lifetime allowance issues

Again, on the basic principle that there is no benefit accrual as a result of the GMP equalisation adjustment, individuals with a form of fixed protection should not be affected. The same is true for individuals with enhanced protection who have been deferred members since before 6 April 2006.

For individuals with primary and individual protections, the adjustment could mean that the value of the individual’s rights is higher than originally notified to HMRC – individuals should notify HMRC of the corrected figure (once it is known) without undue delay.

However, for individuals with enhanced protection who became deferred members after 6 April 2006, there may be relevant benefit accrual – the value of the member’s rights as at 6 April 2006 should include the adjustment for GMP equalisation when carrying out relevant accrual calculations to determine whether the appropriate limit has been exceeded.

In some cases, a GMP equalisation adjustment could result in an increase in value of the member’s benefits such that the individual would qualify for protection from the LTA. If so, the individual can approach HMRC with evidence to support a late notification (though acceptance is not guaranteed). 

Pensioners

For the scheme’s pensioner population, the benefit crystallisation event (BCE) calculations performed for BCE2 at retirement or BCE5 on reaching 75 will need to be reworked, using the revised starting pension and the individual’s remaining LTA at the time of the original BCE2/5. This could result in an LTA charge being triggered (and could have a knock-on impact for any later BCEs). 

Where a pension was in payment from the scheme before 6 April 2006, the GMP adjustment does not trigger a BCE2 (i.e. it is not the pensioner’s first BCE in the scheme). However, if the member has had a BCE in another arrangement since 6 April 2006, there could be knock-on implications for LTA calculations in other arrangements.

Standard principles on the payment of arrears will apply – arrears can be paid as a lump sum (and interest can be paid); the scheme must operate PAYE on the payment but the member can contact HMRC to claim back any overpaid tax. 

Action points

HMRC’s confirmation that there is no need to revisit AA pension input amount calculations for past years will be welcome (though equalisation exercises are likely to trigger a higher incidence of AA tax charges among the scheme’s membership in the year of implementation). The main cautionary note from this guidance is around members with enhanced protection, who became deferred after 6 April 2006. 

Administrators should also note the need to update BCE statements for pensioners, and to amend relevant Accounting for Tax returns and Event Reports.