HMRC has issued its latest newsletter on guaranteed minimum pension (GMP) equalisation. Whilst the newsletter gives some helpful guidance, it also leaves some important questions unanswered.
What does HMRC's newsletter say?
First, the good news. HMRC's newsletter makes clear that:
- Increasing the amount of a benefit as part of a GMP equalisation exercise will not constitute new accrual for annual allowance purposes. This means that increasing benefits as part of a GMP equalisation exercise should not trigger an annual allowance tax charge.
- Similarly, increasing a benefit as part of a GMP equalisation exercise will not cause an individual to lose primary, enhanced or fixed protection. If an individual has primary protection and his or her benefits are uplifted because of GMP equalisation, he or she will need to tell HMRC that the value of his or her benefits as at 6 April 2006 has changed.
- Increasing a deferred member's benefits will cause a corresponding increase in the amount crystallised by the benefit crystallisation event caused by the member starting to draw pension (BCE 2) or reaching age 75 (BCE 5). The effect of this could be to push individuals over the lifetime allowance so that they incur the lifetime allowance charge on the excess.
- Similarly, if a pensioner's pension started on or after 6 April 2006, increasing a pensioner's pension in payment as part of a GMP equalisation exercise will mean re-testing the pensioner's increased benefits against the lifetime allowance at the date on which the pensioner first started receiving benefits. If the result is that the member's benefits exceed the lifetime allowance, the member could incur the lifetime allowance charge on the excess.
HMRC has previously confirmed that paying a top-up to a transfer value to reflect GMP equalisation would not trigger a tax charge.
What doesn't the newsletter say?
The newsletter does not give guidance on what happens if a member's benefit is increased as part of a GMP conversion exercise.
What should I do?
If your scheme is going to equalise (as opposed to convert) GMPs, and it looks like this will cause members to exceed the annual allowance, we would suggest talking to your Mayer Brown contact for advice.
If your scheme is going to convert GMPs, unfortunately HMRC's guidance is of limited help. Again, we would suggest that you talk to your Mayer Brown contact for advice.
Will there be further guidance from HMRC?
We do not at this stage know when (or whether) there will be further updates from HMRC.