HMRC has published “Guaranteed Minimum Pension (GMP) equalisation newsletter – April 2022”, the third in a series that offers guidance on the tax consequences of GMP equalisation. This edition covers the conversion of GMP rights into non-GMP benefits and also top-up payments where benefits have been transferred to another scheme. It also alludes to the possibility of legislative change to further facilitate conversion.
In its July 2020 GMP equalisation newsletter, HMRC said that the “position regarding conversion is complex and … [it] is unable to provide supplemental guidance on conversion, as more detailed work needs to be done on the wider issues associated with that methodology”.
While HMRC continues its work in this area, it has confirmed certain issues, some of which are likely to be particularly helpful to schemes considering or already undertaking conversion exercises for pensioners and for conversions at the time a member retires. All of its guidance on this topic assumes that benefits are converted on an actuarially equivalent basis, although it does offer scope for some pragmatism, by explaining that this means that the benefits before and after conversion have “the same or virtually the same actuarial value”.
Conversion of a member’s benefits after (including immediately after) retirement:
For members who have left pensionable service before 6 April 2006, the Newsletter helpfully confirms that conversion will not constitute accrual and so this would not bring members within the AA regime.
There may still be an impact for other deferred members where a conversion takes place before retirement (whether as part of a bulk exercise or a conversion immediately before retirement) as conversion would mean the loss of DMCO status in the tax year in which conversion took place and possibly in future years depending on the resulting benefits. HMRC has said that it “need[s] to undertake further work in this area to determine the appropriate outcome and treatment, and the potential for any legislative change”.
For all deferreds, regardless of the date of leaving, conversion may also lead to the loss of any fixed protection, with potentially significant adverse consequences for affected members. While HMRC is considering the potential for legislative change in relation to maintaining the DMCO, it appears that maintaining fixed protection is beyond the scope of any further investigation.
HMRC has provided reassurance that, where a transfer has previously been underpaid and a top-up is paid to the original or a different registered pension scheme, this will constitute an authorised payment.
In some circumstances, it may be neither possible nor practical to make a top-up to a registered pension scheme eg where the top-up is small and/or there is no scheme willing and able to accept the payment. The newsletter confirms that a lump sum payment can be made direct to a member and that this will usually be an authorised payment, where:
A quarter of the lump sum paid direct to a member in these circumstances would be tax-free. Trustees would normally remit basic rate tax from the balance to HMRC and pay the net amount to the member.
