The long-awaited guidance on tax issues arising from the equalisation of guaranteed minimum pensions (GMP) has been criticised for failing to address some of the challenges, particularly around breaching the lifetime allowance.
HM Revenue & Customs today (February 20) published guidance in an attempt to solve potential tax issues that have arisen out of the equalisation of GMPs.
In the guidance, the tax authority addressed concerns stemming from the various ways in which GMPs can be equalised, such as through conversion or 'dual record keeping'. But while answers were given on the latter approach the former was lacking in detail.
Experts were particularly critical that the guidance had ignored questions around people breaching the lifetime allowance as a result of the GMP being converted into a regular benefit.
GMP equalisation entered the landscape in October 2018, when the High Court ruled Lloyds bank scheme trustees must equalise benefits between women and men who have GMPs because of contracted out benefits.
Under contracting out rules defined benefit schemes could opt out of the state earnings-related pension scheme, so that individual members would not be tripling up on pension benefits by building up a basic state pension, Serps, and an earnings-related occupational pension.
Between 1978 and 1997, provided the scheme offered a pension of a guaranteed minimum level, the employer and employee were allowed to pay a reduced rate of national insurance contributions and the worker would no longer build up rights under Serps.
The Lloyds ruling was considered a solution for a pension problem spanning almost three decades, and schemes are now having to decide how to equalise the contracted out benefits of their members.
Converting GMPs into a normal scheme benefit is a solution considered by many schemes. But the problem with this, from a member's perspective, is that it will likely uplift the value of their pension, which could trigger an annual or lifetime allowance tax charge.
While HMRC has still not provided clarity on how it will deal with any allowance breaches which occur on the back of this particular method, it has clarified that people who benefited from fixed protection of their lifetime allowance will not lose this protection if the scheme chooses to equalise through the “dual record” method.
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.
There are three fixed protections in place – one from 2012 at £1.8m; 2014 at £1.5m; and 2016 at £1.25m.
David Brooks, technical director at Broadstone, said: “HMRC’s solution for GMP equalisation in respect of annual allowance and lifetime allowance seems about as pragmatic as we could have hoped.
“No doubt there will be wrinkles for individuals and because of this trustees may have to tread carefully for some members. However, other than the unlikely announcement that this can be ignored this might be the best we could have hoped for.