On the go: Inadvertent action by an employer or pension scheme to compensate scheme members for inequalities in guaranteed minimum pensions could invalidate longstanding protection from onerous tax burdens, landing wealthy pensioners with tax bills of hundreds of thousands of pounds.
According to the Financial Times, many employers are putting payments on hold until the issue is resolved.
In December 2018, in a now famous case brought by Lloyds Bank employees, the High Court ruled that pension funds needed to make changes to eliminate inequalities between men and women brought about by historic rules governing GMPs.
In most cases, this could mean relatively small changes to the amount of pension that people will receive. But even a tiny adjustment could invalidate an individual’s longstanding protection against past cuts in limits on pension tax relief, landing them with a huge tax bill.
Any compensation payouts risk invalidating fixed protection arrangements, so individuals could see their lifetime allowance crash down to the current level of £1.05m.
Based on an example provided by Hymans Robertson to the FT, an individual who had fixed protection of £1.8m could, in the worst-case scenario, be landed with a £400,000 tax bill for a payout that boosted their pension by only a few pounds a year.
Tom Yorath, a partner with Aon, told the FT that he was aware of around 100 pension schemes that had frozen compensation payouts until the issue was settled by HM Revenue & Customs.
Speaking to Pensions Expert, Bob Scott, a senior partner at Lane Clark & Peacock, said: “The difficulty here is that everyone would like just to say that compensation payments for GMP equalisation can be made without affecting eligibility for lifetime allowance protection, or generating annual allowance charges or any other tax consequences… but the legislation does not enable HMRC to say that directly.
“To change the position would require primary legislation, and that is not going to happen any time soon with the government paralysed by Brexit.”
Mr Scott added: “This is a consequence of moving from the pre A-Day system of discretionary approval to the current system where everything is codified and the tax officials have no scope to depart from the rules.”
