New guidance on guaranteed minimum pensions has clarified the tax implication of equalising past inequalities between men and women, but critics have said it leaves unaddressed important questions for schemes hoping to convert GMPs into regular scheme benefits.
GMPs were provided to members as compensation for their employer opting out of the state earnings-related pension. As state pensions historically treated men and women differently, schemes have had to equalise their treatment.
The guidance, released by HM Revenue & Customs on Thursday, specifies that for most unequalised lump sum payments made in the past, trustees will be able to top-up those past payments without the past payment being deemed unauthorised.
As a result, the affected member will avoid a 20-40 per cent tax charge, and the scheme a 15-40 per cent tax penalty.
“The reference to extinguishing the member’s (or dependant’s) entitlement to benefits is to all the benefits or rights that could reasonably have been known about at the time of the payment,” the taxman stated.
The industry would appreciate an indication on when HMRC guidance on GMP conversion will be released
James Edelman, Hymans Robertson
It furthermore said that, when considering whether top-up payments are themselves authorised, those payments can be treated separately and without reference to the combined total of the top-up and original lump sum.
Commenting on the guidance, Alasdair Mayes, partner and head of GMP equalisation at Lane Clark & Peacock LLP, said: “It’s great news that trustees will, in many cases, have a clear route through tax rules to equalise past lump sum payments where needed – this is welcome flexibility from HMRC.”
“There was a fear that the need to equalise lump sums paid in the past could make the original payment unauthorised, triggering penal tax charges on lots of individuals with small pension benefits,” he explained.
“This guidance limits that risk to a very narrow set of circumstances, which is good news but not the panacea some hoped for.”
Taxes hit poor pensioners hardest
However, the guidance specified that for "trivial commutation lump sums", whereby people with small pension pots and who are above a certain age may exchange pension payments for a one-off lump sum, a different approach must be taken.
If the top-up brings the total sum over the threshold for unauthorised payments, which at the time was between £15,000 and £30,000, a tax penalty of as much as £10,000 could be triggered, according to Mr Mayes.
Broadstone technical director David Brooks told Pensions Expert these provisions were likely to penalise the poorest.
“If you go to a worst case scenario: if you turn a benefit payment paid from an authorised payment to an unauthorised payment, you can potentially have a tax charge on a member up to 40 per cent of the lump sum they’ve had, and an extra tax charge on the scheme for making an unauthorised payment,” he explained.
“Someone may have had a small lump sum payment 10 years ago, and now they’ll have to try to find 40 per cent of that as a tax charge, because they shouldn’t have had that lump sum.
“It’s a shame they’re treating it in a way that means people will have extra tax charges, and they’ve already got small benefits anyway,” he said. “That’s quite a serious potential impact that isn’t going to go down well with members and trustees. It’s certainly not the member’s fault.”
Lack of guidance on conversion 'gravely disappointing'
While providing welcome clarity in a number of other areas, the lack of guidance on GMP conversion – whereby the equalised GMP is converted into a regular pension for simplicity – has been roundly criticised by observers.
HMRC’s document stated: “The guidance... does not apply to the conversion method. The position regarding conversion is complex and its effects within the pension tax rules may have wider impacts.”
It continued: “HMRC is unable to provide supplemental guidance on conversion, as more detailed work needs to be done on the wider issues associated with that methodology.”
HMRC to issue GMP final ‘outdated’ data cuts in July
HM Revenue & Customs plans to provide defined benefit schemes with final guaranteed minimum pension data cuts by the end of July, despite confirming that some of this information might be out of date and unreliable for use in rectifying incorrect payments.
Mr Mayes pronounced this omission “gravely disappointing” given how long HMRC has had to consider the matter, and that the Department for Work and Pensions has been actively promoting GMP conversion to pension schemes.
Hymans Robertson actuary James Edelman told Pensions Expert that, though he welcomed the clarity provided by the guidance in some areas, “the industry would appreciate an indication on when HMRC guidance on GMP conversion will be released.”
“We do need clarity [on conversion],” Mr Brooks agreed. “It might be that they end up saying: we’ve given you the guidance, if you want to convert you can work it out for yourselves. I wouldn’t be surprised if that’s where we ended up, but they need to say that, otherwise people will just sit around waiting until it happens.”
