HMRC to address major obstacle to GMP conversion

HMRC is consulting on draft legislation to address the potential adverse impact on a member’s annual allowance where trustees wish to implement GMP conversion before retirement.

This is a welcome development, as highlighted in our Pensions Briefing: GMP conversion: Simplifying benefits, investing in the future written at the end of last year. GMP conversion will now be a more attractive option for many schemes.

Currently, many trustee boards implement GMP conversion for pensioners but defer doing so for non-pensioners until retirement. This is because changes to a member’s benefits and scheme rules can trigger an annual allowance charge in the tax year of conversion, and potentially in subsequent years until a member retires.

HMRC’s proposal would remove this charge where the changes are solely to facilitate GMP conversion (including where undertaken to achieve GMP equalisation). The proposed amendments recognise that, in these circumstances, the intention of GMP conversion is not to increase the members’ benefits, but rather to change the way in which those benefits are provided - for example, how pensions revalue before retirement. Under current legislation, however, such changes can still give rise to unintended tax charges.

From 6 April 2027, the changes are intended to give trustees greater flexibility in how and when they apply GMP conversion. In particular, it will become more straightforward to carry out conversion exercises across all members, without waiting until individual retirements. This will simplify both administration and member communications.

It could also mean that GMP conversion prior to retirement can be structured to better reflect the nature of the original benefit than the conversion designs that schemes have had to use to date, without creating a risk of annual allowance charges.

The consultation closes on 13 July 2026, with the new regulations expected to follow later in the year.