HMRC publishes tax guidance on GMP conversion

HMRC has finally tried to set out its view of how GMP conversion would fit with pension tax laws.

Many in the pensions industry had given up hope of HMRC ever issuing tax guidance on this knotty problem but it has now done so in a newsletter published on April 6, 2022. This supplements the GMP equalisation tax guidance previously issued by HMRC in February 2020 and July 2020.

This latest guidance tackles:

• The tax consequences of conversion.
• The tax treatment of correcting past transfer payments to eliminate GMP-related inequalities.

GMP conversion

HMRC starts by flagging that work in this area is ongoing – and complex. Indeed, while the new guidance is helpful on the subject of pensioners, the tax issues facing non-retired members (i.e. actives and deferreds) are effectively parked.

As far as pensioners are concerned, the guidance confirms that – provided the converted benefits “have the same or virtually the same actuarial value as the pre conversion benefits” – conversion of a pensioner’s benefit does not constitute benefit accrual. This is helpful from an annual allowance point of view. HMRC also confirms that conversion of a pensioner’s benefit would not trigger the loss of fixed protection in respect of the lifetime allowance.

However, for members who have not yet retired there are no easy answers. HMRC confirms that conversion could cause them annual allowance issues and loss of fixed protection. HMRC continues to work on this and may even look for changes to the tax laws.

So while HMRC has now helpfully narrowed the category of “problem members” for a conversion exercise, some of the most difficult areas are still outstanding.

Trustees keen to pursue the conversion route for equalising GMPs will need to take advice on how – and when – to progress their conversion project given both the information that is now available and that further information or even legislative change could follow in the future.

Correcting past transfers

The new guidance confirms that a top up to a past unequalised transfer payment can either be paid as an additional transfer payment to the original receiving scheme or as a lump sum direct to the member. If done correctly, both forms of payment will be authorised payments.

If trustees choose the lump sum route, there are three options:

• A payment of up to £10,000 as a “relevant accretion”.
• A payment of up to £10,000 as a small lump sum.
• A payment of up to £18,000 as a winding up lump sum.

Each option has conditions attached under the tax legislation which will need to be met.

The guidance also gives some comfort that no additional annual allowance implications arise (beyond those flagged in previous guidance) and that the status of the original transfer as a “block transfer” won’t be undermined.

However, fixed or enhanced protection could be lost unless the additional transfer is structured as a permitted transfer.

Trustees and employers will need to think carefully about which of these routes works best for their scheme members. It seems to us that paying lump sums direct to members may be more straightforward in many cases than paying additional transfer payments – both from a tax point of view but also more generally (e.g. will receiving schemes be keen to accept top-up transfer payments?).

The possibility of paying lump sums may also be a relevant factor for trustees proactively considering the position of members who have received unequalised transfer payments in the past.

Interest payments on arrears

Separately the Pensions Lifetime Savings Association (PLSA) has published (with HMRC’s blessing) guidance on the tax treatment of interest payments made in respect of arrears of pensions paid to pensioners to correct GMP inequalities.

The interest payments on the arrears should be treated as interest payment made in respect of a late payment of pension instalments. It is likely to be “yearly interest” for tax purposes. Schemes should not be deducting tax at source. Instead members should be advised that they will need to account to HMRC for any tax due on the interest payments.

HMRC plans to include this in a future newsletter, possibly at the end of May.