On the go: Long-awaited guidance on tax issues arising from the equalisation of guaranteed minimum pensions as failed to address key technical and tax issues, according to experts.
HM Revenue & Customs published guidance on Thursday in an attempt to solve potential tax issues that have arisen from the GMP equalisation - the requirement to remove any discrimination between men and women present in benefits provided as a result of employers contracting out of the now-defunct state earnings-related pension scheme.
But experts are critical that the guidance has ignored the more complicated issue of tackling this inequality by converting the GMP into a regular benefit – and fails to mention how it will address any tax bills from breaches of the lifetime allowance.
Contracting out meant defined benefit schemes could opt out of Serps, so that individual members would not be tripling up on pension benefits by building up a basic state pension, Serps and an earnings-related occupational pension.
Between 1978 and 1997, provided the scheme offered a pension of a guaranteed minimum level, the employer and employee would be allowed to pay a reduced rate of national insurance contributions and the worker would no longer build up rights under Serps.
But in October 2018, the High Court ruled that Lloyds bank scheme trustees must equalise benefits between women and men who have GMPs because of contracted-out benefits.
The ruling was considered a solution for a pension problem spanning almost three decades, and schemes are now having to decide how to equalise the contracted-out benefits of their members.
One of the solutions being considered by schemes is converting the GMPs into a normal scheme benefit, resulting in a simpler benefit structure to administer. However, the likely uplift to the value of members' pension could trigger an annual or lifetime allowance tax charge.
HMRC has still not provided clarity on how it will deal with any allowance breaches that occur on the back of this particular method.
However, it has clarified that people who benefited from fixed protection of their lifetime allowance will not lose this protection if the scheme chooses to equalise through the “dual record” method.
The lifetime allowance – the limit on the amount of money that can be saved in a pension without triggering a tax charge – currently stands at £1,055,000. There are three fixed protections in place: one from 2012 at £1.8m; 2014 at £1.5m; and 2016 at £1.25m.
David Brooks, technical director at Broadstone, said: “HMRC’s solution for GMP equalisation in respect of annual allowance and lifetime allowance seems about as pragmatic as we could have hoped.
“No doubt there will be wrinkles for individuals, and because of this trustees may have to tread carefully for some members. Other than the unlikely announcement that this can be ignored, this might be the best we could have hoped for.
“However, that is not to say it isn’t complicated and challenging in parts. Enhanced protection remains a tricky area with the biggest consequences.”
Sir Steve Webb, partner at LCP, welcomed the guidance but said it still leaves important questions unanswered.
“It means in particular that people who had benefited from fixed protection of their lifetime allowance should not lose that protection if their scheme is tackling the GMP equalisation issue in one of a set of ways knowns as the ‘dual records’ methods,” Sir Steve said.
“But for schemes considering tackling this issue through GMP conversion, there is still no clarity about the position of members on protection or other wider pensions tax concerns.
“Although these are complex issues, we do need HMRC to provide reassurance or solutions as soon as possible, not least because resolving this issue could help schemes in other ways, including moving ahead with plans to buy out liabilities.”
Tom Yorath, partner and head of GMP Equalisation services at Aon, agreed that HMRC still had a way to go to address all the issues.
He said: “For a number of schemes that we advise, this provides the much-needed clarity required to implement equalisation – particularly for those proceeding with dual records approaches.
“However, the dozens of schemes queueing up to use GMP conversion will be disappointed that HMRC has ducked these issues. These schemes will now need to consider whether to seek alternative means to manage the challenges that remain.”
