Today, HMRC issued a second tranche of guidance on the tax treatment of equalising pension benefits for Guaranteed Minimum Pensions (GMPs). In my view it contains some welcome flexibility but also two pieces of bad news.

Three key points in the guidance included:

• For most types of lump sum benefit, where an unequalised lump sum has been paid in the past, trustees will have a route to pay a top-up to members without adverse tax consequences;
• An exception is some Trivial Commutations, where a need to equalise could trigger an additional tax charge for some individuals and schemes;
• HMRC have also stated that they are unable to provide further guidance on using GMP conversion to equalise for GMPs.

Lump sums

It’s great news that trustees will, in many cases, have a route to equalise past lump sum payments where needed – this is welcome flexibility from HMRC. One concern had been that the original payment could be deemed unauthorised on the grounds that it had not, in hindsight, settled the whole benefit. Being unauthorised would trigger additional tax charges on the member (20-40%) and on the scheme (15-40%).

Happily, the guidance states that the status of original lump sum is normally unaffected by the need to equalise for GMPs.

Furthermore, in most cases, when checking whether a top-up is authorised, you can consider the top-up in isolation. There is no need to look at the combined total of the original payment and the top up. This is really helpful.

The bad news arises for “Trivial Commutation Lump Sums”, a small subset of the various tax categories of lump sum. For these the guidance says what matters is whether equalising the underlying pre-commutation benefits takes the HMRC value of the benefits over the threshold for authorised payments in force at the time of the original commutation (between £15,000 and £30,000). If so, the original payment becomes unauthorised. In extreme cases the additional tax could be as much as £10,000. Hopefully such cases will be rare, but it is a shame that legislation could not be changed to avoid such situations where a payment has been made in good faith.

Luckily not all full commutations of small pension benefits for a one-off lump sum are “Trivial Commutation Lump Sums” for tax purposes. Over the years several different tax regimes have applied and, for most, HMRC’s guidance provides welcome flexibility.

GMP Conversion

It’s gravely disappointing that HMRC are not able, after more than a year’s work, to publish guidance on the pensions tax implications of using GMP Conversion to equalise benefits. Many pension schemes intend to use GMP Conversion, as promoted by the Department of Work and Pensions. It would have been really helpful if HMRC could have confirmed the tax treatment, as the DWP said they would back in April 2019.

We have a good understanding of what we believe the tax implications are, having worked the issues through with several different pensions lawyers. Only last week we completed a whole scheme conversion, having taken into account the potential Annual Allowance usage it can trigger for some non-pensioners and managing options for those with Fixed Protection.

Even if HMRC are not able to make such issues go away, it would have been really helpful to have the support of published HMRC guidance so that everyone was aware of the potential pitfalls.

Despite the legislative hurdles, I still believe that using GMP Conversion to equalise for GMPs and avoid the complexities of dual records remains a valuable tool for many pension schemes. In light of HMRC’s decision, we will be working to ensure that guidance on using conversion from the PASA chaired Equalisation Working Group is expanded.

The next step in the equalisation journey will be the judgment from the Lloyds hearing that took place in May – here’s hoping that does not throw any spanners in the works.