HMRC’s third GMP Equalisation newsletter April 2022– what now for trustees?

HMRC has now issued its latest GMPE newsletter, which supplements previous HMRC guidance and covers, from a pension-tax perspective, corrective action relating to past transfers-out. It also includes an update and guidance for those schemes choosing to address GMP inequalities using the GMP conversion method (‘D2’).

This is a very welcome update as it will allow some schemes to complete their GMPE projects, as for dual-record methods of GMPE at least, there is now pensions-tax guidance for members who still have benefits secured or payable under affected schemes and past-transfer/full settlement cases.

We’ve summarised below the key points from the guidance.

GMPE and past transfers

Where a transfer value (TV) has previously been underpaid due to GMPE, the trustees/scheme administrators may decide that a member has a right to a top-up transfer payment. Importantly, to be authorised, any top-up TV must satisfy the conditions for a recognised transfer at the time the top-up transfer is made (as opposed to when the original transfer was made). An individual’s right to a top-up TV in these circumstances is an ‘accrued right’ for these purposes.

The receiving scheme may be the same scheme to which the original transfer payment was made or a different scheme.

Lump sum payment

For the purposes of GMPE, a lump sum payment made directly to the member may be possible. It will be classed as 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 under The Registered Pension Schemes (Authorised Payments) Regulations 2009 and winding-up lump sums. Where the member has died, some lump sums can be paid to another individual.

In particular, following what is known as a ‘relevant accretion’, a registered pension scheme can make a payment of up to £10,000 directly to an individual. To be an authorised payment, one of the conditions is that the payment must be made no later than six months after the date the accretion occurs. The HMRC newsletter confirms that the six-month period starts when the scheme administrator has established the member has an actual entitlement to a top-up payment, and the amount of that payment.

Taxation

A top-up TV, 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. This right is an uncrystallised right.

Any lump sum payment made directly to a member to extinguish a member’s right to a top-up TV 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.

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)), it 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.

Annual Allowance

No further annual allowance implications arise where a top-up TV is made, or a lump sum is paid to extinguish the right to a top-up TV; i.e. past pension input calculations do not need to be revisited.

HMRC Protections

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 GMPE and settled as a recognised transfer or authorised lump sum payment.

It is important to note that paying an additional transfer in respect of a member could result in a loss of fixed or enhanced protection if the transfer is not a permitted transfer.

GMP Conversion

HMRC’s latest newsletter also provides an update for schemes using the GMP conversion method to achieve GMPE. HMRC emphasises that its work in this complex area continues.

For scheme sponsors and trustees, it is important to note that this newsletter from HMRC does not provide ‘all the answers’. That said, there is now more clarity that, whilst the same cannot be said for deferred members, GMP conversion should have no tax impact on the annual allowance and fixed protection of pensioners. Further legislation is not ruled out.

So, what should trustees be doing now?

• Get your data sorted (and not just for GMPE; come 2023, pension schemes will be required to provide information to the Pensions Dashboard so that pension savers can see all their benefits in one place).
• Agree your approach. At this stage there should be no need for lengthy / costly reports on the different methods; unless you have a compelling reason to convert GMPs into scheme benefits then adopt the method of minimum interference – Method C2 – which all third party administrators should be able to accommodate. Alternatively, for easier administration, use Method B or C1, provided the increase in liabilities is not materially different relative to C2.
• Equalise benefits going forward, for future transfers and retirements (just because you use one method as an interim solution for future settlements, you are not bound to use that method for the wider GMPE project).
• Equalise benefits for those that currently have benefits secured and payable under the scheme; especially those who are already retired and may be due years of arrears payments.
• Revisit past settlements – transfers-out, deaths, trivial commutations.
• When you have something to tell them, i.e. you have quantified the GMPE uplifts, communicate with members.