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This publication is available at https://www.gov.uk/government/publications/guaranteed-minimum-pension-gmp-equalisation-newsletter-february-2020/guaranteed-minimum-pension-gmp-equalisation-newsletter-february-2020
As we’ve explained in previous pension schemes newsletters, HMRC formed a working group of selected industry representatives to help us consider the pension tax issues arising when equalising benefits for the effects of inequalities in Guaranteed Minimum Pension (GMP), in light of the Lloyds case.
We want to thank the industry members of the working group for their technical input, practical observations and continued help with this work.
In this newsletter we are giving guidance to supplement the existing guidance in the Pensions Tax Manual relating to benefit adjustments for registered pension schemes with periods of contracted out pensionable service between 17 May 1990 and 5 April 1997.
The judgement in the Lloyds case considered a number of methods by which pension scheme benefits might be adjusted for GMP equalisation. There’s no single method by which pension schemes can equalise benefits for the effect of GMPs and it is for the trustees and employers of each pension scheme to decide what method is most appropriate for their scheme. HMRC cannot comment on the choice of methodology.
This guidance relates to benefit adjustments where the reason for the adjustment is solely for GMP equalisation and does not cover other benefit adjustments, if any, which occur at the same time. The guidance in this newsletter relates to those equalisation methods whereby a dual record keeping approach is used but does not apply where a conversion method is applied.
For pension schemes wanting to use the conversion method, a method that converts scheme benefits into a new form of benefit, there may be consequences for some members if this method is applied. For example, converted benefits through a higher revaluation or higher rates of pension in the year of conversion, and in subsequent years beyond conversion, which may result in either the loss of deferred members carve-out or fixed protection, or both.
This guidance covers pension tax issues such as:
- annual allowance, including deferred member carve-out
- lifetime allowance, including fixed, primary, individual and enhanced protection
We know that this is a complex area and some individuals may also need to be considered on a case by case basis depending on their particular circumstances.
HMRC continues to explore with the working group those pension taxation issues associated with the equalisation of GMPs but not included within this supplementary guidance. This includes the treatment of lump sum and death benefit payments and we aim to give more guidance on these as soon as possible as well as continue to explore the tax implications for schemes choosing to use the conversion methodology.
GMP equalisation may mean an increase to the amount of pension due at retirement (such as, the adjusted benefit is higher than that without GMP equalisation). Any such increase is not a new entitlement as the increase results from membership of a pension scheme in the period between 17 May 1990 and 5 April 1997. Therefore, in the main, such GMP equalisation benefit adjustments, on their own, would not constitute new accrual of benefit that should be tested for annual allowance purposes or which would prejudice applicable lifetime allowance protections.
However, such adjustments might have an impact on the amount of any previous and future benefit crystallisation events.
3. Annual Allowance
3.1 Pre-6 April 2006 deferred members
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 on the basis that the GMP equalisation benefit adjustments should simply reflect the benefit the member had accrued before 6 April 2006. This should not result in any benefit accrual after 5 April 2006 that would otherwise bring the arrangement within the annual allowance provisions.
3.2 Deferred members otherwise covered by the ‘deferred member carve-out’
An individual who is otherwise within the annual allowance deferred member carve out (DMCO) in relation to an arrangement should remain within the DMCO for that arrangement. GMP equalisation benefit adjustments are a series of percentage increases that are attributable solely to the application of section 67 of the Equality Act 2010 and so within the relevant statutory increase percentage aspect of the annual allowance DMCO. This is the case regardless of whether a sex equality rule has been incorporated into the rules of the pension scheme under which the arrangement is held.
3.3 Other deferred members and active members
HMRC considers that there is no need to revisit pension input amount calculations done in the past, for changes to implement GMP equalisation. Calculations for the pension input amount in the tax year of implementing GMP equalisation and tax years thereafter will need to take into account the revised amount of the benefit entitlement in both the opening and closing benefit calculations.
4. Lifetime allowance protections
GMP equalisation benefit adjustments should simply reflect the benefit the member had accrued before 6 April 2006. On its own, this would not result in any benefit accrual after 5 April 2006.
4.1 Fixed protections (FP, FP14, FP16)
An individual who otherwise has a fixed protection should retain that protection. Any increase solely for GMP equalisation will not be ‘benefit accrual’ and so should not result in loss of fixed protection. If the reason for the increase is a mixture of GMP equalisation and other adjustments, then fixed protection could be lost. PTM093500 gives more information about ‘benefit accrual’ under fixed protection.
4.2 Primary and individual protections
GMP equalisation benefit adjustment could mean the value of rights protected are higher than originally notified to HMRC. Individuals should notify HMRC of the corrected figure without undue delay. If the individual used the online notification process to protect their pension savings (Individual Protection 2016 only) they can amend the protection by accessing their personal tax account. Otherwise, they will need to tell HMRC in writing.
4.3 Enhanced protection
Individuals with enhanced protection lose it if they have ‘relevant benefit accrual’. Benefits held under defined benefits arrangements are tested to see if relevant benefit accrual has occurred when:
- a benefit crystallisation event (BCE) occurs under the arrangement or a related arrangement
- all or part of the member’s rights under the arrangement are transferred to an other money purchase arrangement
PTM092430 gives guidance about ‘relevant benefit accrual’, including when it occurs and how to test benefits for relevant benefit accrual.
For individuals who have been deferred members since before 6 April 2006 then any GMP equalisation benefit adjustments should not be ‘relevant benefit accrual’.
Individuals who have not been deferred members since 6 April 2006 will have accrued benefits that with any GMP adjustments may result in relevant benefit accrual. When carrying out the relevant accrual calculations, the value of the member’s rights under the arrangement as at 5 April 2006 needs to include the adjustment for GMP equalisation valued at that date.
4.4 Late claims for lifetime allowance protection
Where GMP equalisation benefit adjustments result in an increase in value of the member’s benefits, meaning the individual would qualify for protection from the lifetime allowance charge, the individual can approach HMRC with evidence to support their late notification.
The criteria to be considered in respect of whether or not HMRC may accept a late notification for protection from the lifetime allowance charge is different depending on the type of protection being applied for. More information can be found in PTM098000.
5. Lifetime allowance and BCE calculations
5.1 GMP equalisation implemented before a BCE
GMP equalisation benefit adjustments that increase the individual’s starting amount of pension will increase the BCE2 amount when the individual becomes entitled to the payment of that pension. The same applies in relation to a BCE5 if the individual has not become entitled to benefits before their 75th birthday. The guidance set out in PTM088600 will apply.
5.2 Pensioner members when GMP equalisation is implemented
Where GMP equalisation implementation results in an increase to what should have been the individual’s starting pension at retirement, the original BCE2 that occurred at retirement requires correction by reference to the revised starting pension with the test for any lifetime allowance charge (or any additional lifetime allowance charge) being by reference to the individual’s remaining lifetime allowance at the time of the original BCE2 date. The same applies in relation to a BCE5.
Any increase solely for GMP equalisation will be a correction of an entitlement that has already arisen and does not create a new entitlement for tax purposes. If the reason for the increase is as a mixture of GMP equalisation and other adjustments this could be a new entitlement for tax purposes.
Where a recalculated BCE results in a member exceeding their remaining lifetime allowance then an lifetime allowance charge will be due. Scheme administrators should consider what process is appropriate to adopt to identify whether any GMP equalisation adjustment to the member’s benefit in their scheme is likely to have resulted in an lifetime allowance charge. PTM083000 provides guidance about the lifetime allowance charge.
The recalculated BCE2 will affect any BCEs a member may have had after becoming entitled to the scheme pension that is being adjusted for GMP equalisation. Members will need to consider the tax effects of the recalculated BCE2 on later benefit crystallisations. This may include the member becoming liable to an lifetime allowance charge, or to a greater lifetime allowance charge.
Where the pension in question started before 6 April 2006, the GMP equalisation benefit adjustment will not trigger a BCE2 in the scheme. However, for members who have had BCEs since 6 April 2006, the adjustment for GMP equalisation will affect any BCEs. As explained in PTM088300 when a member has their first actual BCE on or after 6 April 2006 there is a notional BCE reflecting the value of any pension in payment on 5 April 2006, and the GMP equalisation benefit adjustment may mean that that notional BCE should have been different, with implications for the testing on the first actual BCE and any subsequent ones as described above.
Members who became entitled to their scheme pension after 5 April 2006 will have been given an annual BCE statement showing the percentage of the lifetime allowance used up. The BCE statement will need to be updated going forward with correct information. The revised percentage of lifetime allowance used up by the BCE should be assessed by reference to the lifetime allowance at the date of the original BCE. PTM164400 explains when the scheme administrator should give the member a BCE statement and what it should include.
6. Paying the lifetime allowance charge
The guidance in PTM086000 sets out who is liable for the lifetime allowance charge. The scheme administrator is jointly and severally liable for any lifetime allowance charge arising in the member’s lifetime. The scheme administrator is expected to account for any charge due directly to HMRC using the Accounting for Tax return.
A scheme administrator can apply in writing to HMRC to have all or part of their liability to the lifetime allowance charge discharged - the conditions are explained in PTM158000. Whether or not HMRC will agree to the discharge will depend on the particular circumstances and it is not possible to say in advance of an application whether the circumstances will fulfil the requirements of a discharge.
The Accounting for Tax return in which the original BCE was reported should be amended to reflect the updated amount. Similarly, any Event Report will need to be amended if the value of events reported have changed or the revision to benefits results in further reportable events. How to amend the Accounting for Tax return and the Event Report can be found in the send pension scheme reports guidance.
Guidance of how the tax should be paid can be found at PTM162300.
Arrears of pension may be paid to scheme members as a lump sum as part of the GMP equalisation exercise. The pension payer is required to operate PAYE on the lump sum. However, the amount of pension income charged to tax is the amount of pension the member is entitled to in the tax year (the accruals basis).
The amount of tax deducted under PAYE may be more than the tax due under the accruals basis. Members can contact HMRC to claim the correct tax treatment (see EIM74103. Pension schemes may pay interest on arrears of pension. PTM143100 explains how this interest will be taxed.
Scheme members may need to correct a previous Self Assessment tax return if an lifetime allowance charge has changed or now applies.