Savers will have to wait until the autumn for the government to come up with a solution for the tax bill they could get if their defined benefit scheme opts to convert their contracted out benefits.
In its monthly pension scheme newsletter, published yesterday (June 26), HM Revenue & Customs said the guaranteed minimum pension equalisation working group was focusing on what could be delivered within the existing legislation, which will be supported by guidance where appropriate.
With two meetings in May and June and another one scheduled for July, the group was "making good progress in exploring a number of approaches, and are considering these to ensure they have the desired outcome and avoid potential unintended tax consequences".
"This make take some time so it’s unlikely we’ll be able to update guidance before the autumn," HMRC added.
FTAdviser reported in February that about 100,000 savers could face a six-figure tax bill if their scheme opts to convert the contracted-out benefits.
According to a freedom of information request from Royal London, this is the number of people who have secured fixed protection against past cuts in the lifetime allowance for tax relief purposes.
This allows the member to protect the allowance from further reductions, but the saver can no longer contribute to their pension. If their pension changes due to GMP equalisation this could breach the protection.
HMRC officials noted that these issues could be complex and it was possible the government might not be able to resolve these with existing legislation.
But HMRC said it was committed to finding a “pragmatic and proportionate outcome to all of the pension tax issues,” it concluded.
Steve Webb, a former pensions minister and director of policy at Royal London, said this “whole sorry saga looks set to drag on for months, if not years”.
He said: “I have no doubt that HMRC would like to be able to sweep GMP adjustments under the carpet when it comes to things like fixed protection, but so far they don’t seem to have found a cast-iron way of doing this.
“If legislation is needed, then a Finance Bill after a Budget would be the obvious route. But with current political uncertainty, we can’t be sure when the next Budget will be, and if it is new government it is unlikely that sorting this out will be a top priority for legislation.”
The lifetime allowance – the limit on the amount of money that can be saved in a pension without triggering a tax charge - currently stands at £1.05m.
There are three fixed protections in place – one from 2012 at £1.8m; 2014 at £1.5m; and 2016 at £1.25m.
If someone’s tax relief limit suddenly fell from £1.8m to the current £1.03m, they could face a 55 per cent tax charge on the difference – a bill of £423,500.
The issue stems from the Lloyds case in October when the High Court ruled that trustees of the bank’s pension scheme must equalise benefits between women and men who have GMPs because of contracted out benefits.