Guidance

Guaranteed Minimum Pension equalisation newsletter — April 2022

Published 6 April 2022

1. Introduction

This newsletter supplements previous guidance in Guaranteed Minimum Pension (GMP) equalisation newsletters February 2020 and July 2020 relating to benefit adjustments that registered pension schemes may have to make to remove inequalities arising from GMPs.

As a result of the judgment in the Lloyds 3 case, scheme administrators may also need to take corrective action in relation to transfer payments previously paid which were calculated on a basis that did not take account of the adjustments needed to eliminate GMP-related inequalities. This guidance relates to the tax issues that arise in respect of such corrective actions.

We’re also providing an update and guidance for those schemes choosing to equalise using the GMP conversion method.

2. GMP equalisation

2.1 Making a transfer top-up payment

For the purpose of GMP equalisation, where a transfer payment has previously been underpaid, scheme administrators may decide that a member has a right to a top-up transfer payment that is to be made to another pension scheme. In order to be an authorised payment, any top-up transfer payment must satisfy the conditions for a recognised transfer that apply at the time the top-up transfer is made.

The following paragraphs provide more detail about how a top-up transfer payment fits with the different elements of the definition of a recognised transfer.

Transfer of sums or assets held for the purposes of, or representing accrued rights under, a registered pension scheme

An individual’s right to a top-up transfer payment in these circumstances is an ‘accrued right’ for these purposes. It derives solely from the right to benefits that the individual previously had under the transferring scheme. A top-up transfer payment will therefore be the transfer of sums or assets which represent accrued rights under the transferring scheme.

Payment must be made in connection with a member of the transferring scheme

An individual whose only accrued rights in the transferring scheme is the right to a top-up transfer payment will be a ‘deferred member’ for tax purposes, being a person with an accrued right to a benefit (the right to the top-up transfer payment) who is neither an active member nor a pensioner member of the transferring scheme. A top-up transfer payment made in respect of such an individual will be a payment made in connection with a member of the transferring scheme.

Transfer must be to a registered pension scheme or a qualifying recognised overseas pension scheme

The receiving scheme must be a registered pension scheme or a qualifying recognised overseas pension scheme at the time the top-up transfer payment is made. The receiving scheme may be the same scheme to which the original transfer payment was made or a different scheme.

2.2 Making a lump sum payment

For GMP equalisation purposes, a lump sum payment made directly to the member may be possible and it will be an authorised payment where it meets the payment conditions at the time the payment is made. This includes the payment of lump sums and small lump sums provided for in The Registered Pension Schemes (Authorised Payments) Regulations 2009 (SI 2009/1171), as well as winding-up lump sums.

Where the member has died, some lump sums can be paid to another individual and further guidance is set out in the Pensions Tax Manual — PTM063000.

Lump sum payment (relevant accretion)

A registered pension scheme can make a payment of up to £10,000, following what is known as a relevant accretion, directly to an individual as an authorised payment. The conditions for this are provided for in regulations 6 and 7 of SI 2009/1171. Guidance on the payment conditions for these lump sums is set out in the Pensions Tax Manual — PTM063700.

In determining if there’s been a relevant accretion, for GMP equalisation purposes, the scheme administrator is not regarded as having been aware at the time of the original transfer payment (and is not regarded as reasonably expected to have been aware) that the member was entitled to a benefit under the transferring scheme. This is provided that at the time of the original transfer the scheme administrator was not in a position to know that particular member was entitled to a further benefit and the amount.

To be a relevant accretion after a transfer out (reg7(2a)), there must have been a recognised transfer to another registered pension scheme or to a qualifying recognised overseas pension scheme in respect of the member.

Guidance on recognised transfers is set out in the Pensions Tax Manual — PTM100010. A transfer made before 6 April 2006 would not be a recognised transfer as it was not made from a registered pension scheme.

To be an authorised payment, one of the conditions is that the payment must be made no later than 6 months after the date the accretion occurs. The 6-month period starts when the scheme administrator has established that the member has an actual entitlement to a top-up payment and the amount of that payment. This means that the scheme administrator has traced the member and has obtained any necessary information (such as bank details) or consents, or both that are required to make the payment.

Small lump sum payment

A registered pension scheme can also make a payment of up to £10,000 in the form of a one-off lump sum under conditions provided for in regulations 11 and 12 of SI 2009/1171. However, payments cannot be made if there’s been a recognised transfer from the scheme (or, for regulation 11, any related scheme) in respect of the member during the 3 years preceding the date of the payment.

Again, guidance on the payment conditions for these lump sums is set out in the Pensions Tax Manual — PTM063700.

Winding-up lump sum payment

Where the pension scheme is winding up, a lump sum may be paid as a winding-up lump sum provided the other conditions for a winding-up lump sum are met. The payment limit is £18,000.

The conditions for winding-up lump sums are provided for in paragraph 10 of schedule 29 to the Finance Act 2004, and further guidance can be found in the Pensions Tax Manual — PTM063600.

2.3 Taxation

A top-up transfer payment (and any lump sum paid to extinguish that right) derive from the additional rights to benefits that the individual had under the transferring scheme and which were not taken into account when the original transfer was calculated.

The right to a top-up transfer payment is an uncrystallised right for the purposes of tax legislation, as the member is not entitled to present payment of benefits in respect of the right under the transferring pension scheme. Any lump sum payment that is made directly to a member to extinguish a member’s right to a top-up transfer payment will be a payment in respect of uncrystallised rights.

Where the payment is to the member (or following the member’s death, to the member’s estate) and is in respect of an uncrystallised right, tax is due on 75% of the lump sum but not on the remaining 25%. Where the lump sum is paid to another individual following the member’s death (and is an authorised lump sum that is not required to be paid to a member (or to their estate), the lump sum will be wholly taxable.

Tax is due in the tax year in which the lump sum is paid, and PAYE should be operated on the lump sum. Guidance of how the tax should be paid can be found in the Pensions Tax Manual — PTM063700. For these purposes, the PAYE treatment is the same as that applicable for taxable lump sum payments and section 2.2.1 of CWG2 therefore applies.

Annual allowance

Guaranteed Minimum Pension (GMP) equalisation newsletter — February 2020 explained the annual allowance implications of making benefit adjustments in the context of GMP equalisation.

No further annual allowance implications arise where action is taken by scheme administrators to reflect those adjusted benefits in cases where an individual has previously taken a transfer in relation to their unadjusted benefits, such as where a top-up transfer payment is made or a lump sum is paid to extinguish the right to a top-up transfer payment.

Protections

Certain transitional protections can continue to apply after a transfer, only where that transfer meets the conditions for a ‘block transfer’. For example, retaining a protected pension age or right to a pension commencement lump sum which exceeds 25% of uncrystallised rights.

A transfer is a block transfer if it involves the transfer of all of the sums and assets relating to the member and at least one other member in a single transaction. The original transfer will not stop being a block transfer purely because, after that transfer is made, further benefit entitlement is later identified as a result of GMP equalisation and settled as a recognised transfer or authorised lump sum payment.

However, paying an additional transfer in respect of a member could result in a loss of fixed or enhanced protection if the additional transfer is not a permitted transfer.

Further detail on protections can be found in the Pensions Tax Manual — PTM093400 and in the Pensions Tax Manual — PTM092420.

3. GMP conversion

3.1 Background

There is no single method by which pension schemes must equalise benefits for GMP. It is for the trustees and employers of each pension scheme to decide what method is most appropriate for their scheme. The GMP conversion method, where the scheme uses the GMP conversion legislation in accordance with section 24A (2) of the Pension Schemes Act 1993, enables trustees to disapply the statutory requirements regarding GMP for some or all of the members in their scheme, subject to satisfying certain conditions.

In previous newsletters we explained that we have been looking at the effects and wider tax implications associated with the GMP conversion method with our industry working group. This is a complex area and although our work continues, we wanted to highlight the issues identified, and provide confirmation on those particular aspects of the pensions tax legislation where we can.

In this newsletter, we assume trustees are using the GMP conversion method on the basis that the value of adjustment made to a member’s benefit is on an actuarial equivalence basis only. This means, the post conversion benefits have the same or virtually the same actuarial value as the pre conversion benefits.

We assume that where the conversion for a member is to achieve the required removal of inequalities arising from GMPs, the conversion is on the basis of seeking to achieve both equality of present value on the conversion date and equality of benefit payments thereafter between men and women for benefits earned from 17 May 1990.

3.2 Members who have not retired or deferred members

For scheme members who have not retired, there are likely to be impacts on the treatment of their annual allowance in the tax year of conversion, as well as in all subsequent tax years up to and including that of retirement. For example, in the tax year of conversion, even if there’s no other change in the member’s benefit entitlement, the removal of the GMP rules may cause the loss of the member’s deferred member carve-out (DMCO) and result in a pension input amount calculation for the tax year, as well as for subsequent tax years.

We need to undertake further work in this area to determine the appropriate outcome and treatment, and the potential for any legislative change.

For deferred pension scheme members, the effects of GMP conversion may also cause the loss of fixed protection. This is because fixed protection is lost if, at any time in a tax year, a member’s benefits increase by more than a certain amount. Therefore, schemes wishing to use the conversion method should consider the tax implications that may arise for these members in accordance with the existing legislation.

3.3 Pensioner members and those who have left pensionable service pre 6 April 2006

For existing pensioners, those retiring imminently and members who have left pensionable service prior to 6 April 2006 and fall outside the annual allowance regime, we can provide confirmation of the expected pensions tax position.

For existing pensioner members’

Where GMP conversion of benefits is undertaken for members when the pension is already in payment, the following should apply:

• annual allowance — conversion of a pensioner’s benefit (after the tax year of retirement) would not constitute benefit accrual and so there is no pension input amount
• fixed protection — conversion of a pensioner’s benefit (any time after retirement) would not trigger the loss of fixed protection, if all benefits in the arrangement have been crystalised
• lifetime allowance — conversion of a pensioner’s benefit could (if it involves an immediate jump in pension rate) result in a BCE3 (benefit crystallisation event) — a BCE3 occurs when a scheme pension already in payment is increased beyond a permitted margin — in making the assessment of whether a BCE3 has been triggered, quantifying it would be by comparison to the levels of pension deemed to be in payment since retirement, but after adjustment for the application of a dual record equalisation method applied by the scheme to calculate any arrears due and any restatement of past lifetime allowance usage

For pensioners that have recently retired

Where GMP conversion is undertaken after retirement but it is still in the tax year of retirement, the following should apply:

• annual allowance — conversion within the tax year of retirement (but after retirement) would not constitute benefit accrual (even if the resulting increase in the rate of the member’s pension as a result of that conversion triggers a BCE3)
• DMCO — where the DMCO applied to the member in the tax year in the period up until the crystallisation of the member’s benefits at retirement, this continues to be the case — the subsequent conversion of those crystallised benefits in that tax year (even if the resulting increase in the rate of the member’s pension as a result of that conversion triggers a BCE3) does not affect the assessment of whether the DMCO applies to the member in that tax year
• lifetime allowance — where the rate of payment of a crystallised pension is increased as a result of the subsequent conversion of crystallised benefits, the assessment of whether that increase triggers a BCE3 would be tested against the level of pension deemed to be in payment before conversion, and on which the member’s retirement BCEs would have been assessed, or re-assessed, if the equalisation is being implemented after retirement — this would reflect the dual record equalisation method applied to calculate any arrears due and to restate past lifetime allowance usage

For members who have left pensionable service pre 6 April 2006

Annual allowance — an individual who became a deferred member before 6 April 2006 under an arrangement, and who has remained outside the annual allowance provisions since that date in relation to that arrangement, should still remain outside of those provisions for that arrangement. This is provided the new benefit has the same actuarial value following conversion (that is, the post-conversion benefit is actuarially equivalent to the pre-conversion benefit).

We continue to work through the pension tax issues associated with the GMP conversion method with our Industry Working Group. We will provide further updates in future pension schemes newsletters.