The taxman will publish its long-awaited guidance to address tax issues stemming from the equalisation of contracted out benefits in December.
In its monthly pension scheme newsletter, published yesterday (October 30), HM Revenue & Customs said the guaranteed minimum pension equalisation working group had been focusing on what can be delivered within the existing legislation, and this would be supported by guidance where appropriate.
The guidance to be issued in December will focus on the lifetime allowance, LTA protection regimes, and the annual allowance, and will apply to schemes that haven’t chosen a particular methodology to equalise GMPs.
For schemes opting to equalise through conversion, a method that converts scheme benefits into a new form of benefit, the issues are “proving more complicated to resolve”, HMRC stated. However, it will continue to work on solving these questions, it added.
The problem with this method, from a member's perspective, is that it will likely uplift the value of the pension, which could trigger an annual or lifetime allowance tax charge and a breach of allowance protections.
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 £1,055,000 and there are three fixed protections in place – one from 2012 at £1.8m; 2014 at £1.5m; and 2016 at £1.25m.
These allowed people to lock in previous thresholds but once breached the saver faces a tax bill and their LTA protection is lost.
Converting GMPs into a normal scheme benefit is one of a number of options considered to solve a problem dating back to the Lloyds case in October 2018 when the High Court ruled that trustees of the bank’s pension scheme must equalise benefits between women and men who have guaranteed minimum pensions because of contracted out benefits.
The ruling was considered a solution for a pension problem spanning almost three decades, and DB schemes are now having to decide how to equalise the contracted out benefits of their members.
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.
But HMRC stated this was a complex piece of work and that the taxman “may not be able to resolve all of the issues in this way”.
It added: “We may need to consider some individuals on a case by case basis depending on their particular circumstances."
Stephen Scholefield, a partner at law firm Pinsent Masons, noted the new guidance might leave many questions unanswered.
He said: “In particular, the tax issues associated with conversion, which seems the most popular method of achieving equalisation, are not straightforward.
“It looks like HMRC will not be giving an easy fix there, in which case schemes may continue to slow peddle on implementation - despite the encouragement from the department for Work and Pensions to the contrary.”