The latest industry working group guidance (on data issues) is now available, along with fairly helpful further guidance from HMRC on lump sums. Unfortunately, there is still no guidance from HMRC on GMP conversion and that may be a long way off at best. We are waiting for judgment in the latest instalment of the Lloyds case, relating to the treatment of transfers, and in which both DWP and HMRC intervened.
Guidance on data issues
The industry GMP Equalisation Working Group (chaired by Geraldine Brassett of PASA and formed by the Pensions Regulator) has issued guidance on the data required for GMP equalisation. It aims to help trustees understand what data will be required to carry out GMP equalisation and what to do in the case of missing data. Other areas covered include managing advisers (communication is important) and how to deal with different member groupings. Trustees and employers will need to consider their own scheme’s circumstances including what other data projects are ongoing or envisaged, and administrator capacity. Legal advice may be required on the proposed approach to be adopted.
HMRC has published a July newsletter with information on how it will tax lump sums payable following a GMP equalisation exercise. Its guidance applies only where there is an adjustment solely for GMP equalisation and crucially it does not cover GMP conversion. Building on previous guidance, HMRC adopts a relatively pragmatic approach.
If benefits have been paid out, a further lump sum may be payable if the member has been underpaid because of unequal GMPs.
How will this affect the original lump sum?
Some lump sum payments are only authorised for tax purposes if they extinguish all the member’s rights under the scheme, such as serious ill health lump sums, winding-up lump sums, trivial commutation lump sums and small payments. HMRC helpfully say that these will not stop being authorised if a further entitlement is identified as a result of GMP equalisation: the rights to be extinguished are ‘those that could reasonably have been known about at the time of the payment’.
Some lump sum payments, notably small payments and winding-up lump sums, also have a monetary limit on the amount of the payment. HMRC say that a later equalisation adjustment will not make the original payment unauthorised provided the latter was within the limit applicable at the time.
Where matters get more difficult is around trivial commutations. These are different in that there is a limit for trivial commutation being the value of the member’s rights under all registered schemes (£30,000 since 2014). As GMP rights should be included in the valuation of rights at any point in time after 1997, the relevant limit may be found to have been breached when the adjustment is made now for equalisation of GMPs, meaning that the original lump sum will have been unauthorised (unless it meets the payment conditions for another type of payment). This is less helpful but is the corollary of HMRC’s acceptance in February that GMP equalisation rights have existed since before the current pensions tax regime started in 2006 and are not new. This may require schemes to look back at their history of trivial commutations once they have carried out their equalisation exercise and also to liaise with other registered schemes in which the member had benefits relevant to the application of the limit. Schemes will need to consider and take advice on how far back to go in practice.
How is a lump sum top-up paid now treated?
Where an adjustment has been made, a further lump sum payment (including a ‘top-up’ to a previous lump sum), will need to satisfy the conditions for authorised payments and will be taxed at the time it is made (and not the date of the original payment). A pension commencement lump sum therefore can only be made within the period 6 months before or 12 months after the member becomes entitled to their pension.
Helpfully HMRC points out that scheme trustees can choose how to structure different types or tranches of benefit into different arrangements under their scheme. As a serious ill health lump sum has to extinguish all rights in the particular arrangement at the time, it may be possible for example that any new lump sum payable now could be structured as falling within a different arrangement, but legal advice will be required before relying on this. A trivial commutation lump sum can be paid to extinguish the member’s rights under the scheme but this has to be within 12 months of the first trivial commutation lump sum having been paid to the member by any registered pension scheme. A further route for making a lump sum payment could in some circumstances be the ‘small payments’ process where further rights have been identified as payable to a member and the value of their total rights under the scheme is not more than £10,000. Such payment could be made after the member’s death to survivors, which may be helpful where the member has died since the original payment.
All this means that there are more likely to be tax efficient solutions for closed cases than for current pensioners. We expect schemes to consider and take advice on the extent to which top-ups can now be structured as additional pension rather than lump sums.
Where a top-up to a defined lump sum death benefit (e.g. a five year guarantee) is paid more than two years since becoming aware of the death, the payment will be taxable regardless of the member’s age at death, but the payment will be authorised.
This guidance follows that issued by HMRC in February on the implications of GMP equalisation for the annual allowance and the lifetime allowance. We are still hoping for guidance on conversion of GMPs but this current newsletter says that the position is complex and more work needs to be done on wider issues. There is an implication that HMRC will eventually publish guidance on this issue but it seems far from certain. It is notable that HMRC stresses that the guidance is purely in relation to GMP equalisation and that this represents ‘exceptional circumstances’ so care should be taken before applying the guidance to other benefit errors.
On a separate note, we are of course also awaiting the outcome of the Lloyds Bank case on how GMP equalisation affects transfers (particularly past transfers). We expect the judgment to be published in the Autumn.