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.”
David Robbins, director at Willis Towers Watson, noted the first part of December will see the election purdah period and "a new or reshuffled government might have other priorities than to sign this off in the first couple of weeks after polling day".
He said: "Even if this timetable is adhered to, the newsletter suggests that the promised guidance will not cover the tax treatment of conversion, which can give rise to the biggest changes in pensions as measured for annual allowance and lifetime allowance purposes.
"There is a lot that schemes can do and are doing now to progress equalisation, but it would obviously help if the government could confirm the tax consequences of various decisions, particularly if it wants to encourage them to go faster.”
David Brooks, technical director, said he was pleased with today's announcement, as HMRC was finally breaking the "silence on the tax treatment of adjustments to benefits in respect of lifetime allowance and annual allowance.
"However, there remains slew of ancillary issues that need to be resolved and these are still being worked on," he noted.
He added: "Scheme trustees are under increasing pressure to proceed with this from high up in government but the government’s responses to these important issues remains the main blockage to progress.
"Lawyers also continue to wriggle uncomfortably in the absence of regulations to tidy up the conversion regulations, which will be a path many pension trustees and employers will want to use to resolve this issue once and for all."
Alasdair Mayes, head of GMP equalisation at consultancy firm LCP, noted it was "important that HMRC keep up the work on this because their guidance will be a critical factor in helping schemes choose the best method to adopt for equalisation.
“We are finding that many schemes are still trying to understand their GMP options and are still in the process of gathering the vital data they need to complete the task," he added.
The working group will continue to work on other pension tax issues including the payment of crystallised lump sums, such as serious ill-health lump sums, small pots and trivial commutation.
FTAdviser reported in August that members of DB schemes who haven’t equalised their contracted out benefits have been stopped from cashing in their small pots.
A further update on the issues will be made alongside the expected guidance in December, HMRC said.
maria.espadinha@ft.com
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