HMRC have clarified in today's Newsletter the income tax treatment of interest for pensioners receiving a lump sum where their pension has been underpaid in the past.  These payments have become increasingly common as a result of both rectification and equalisation for Guaranteed Minimum Pensions (“GMPs”).

 Commenting on the guidance, Alasdair Mayes, Head of GMP Equalisation at LCP said: 

  “This guidance from HMRC will provide a welcome boost for hard pressed pensioners.  Lots of pensioners are due to receive lump sums where their pension has been underpaid in the past as a result of GMP Equalisation.  Confirming that any interest included in the lump sum should not be taxed as pension, but rather should be paid gross and taxed in the same way as bank and building society interest means most pensioners will not need to pay tax on the interest they receive – few basic rate tax payers use up their £1,000 personal savings allowance.  The sums involved may not be large, but every little helps.”