Her Majesty’s Revenue & Customs (“HMRC”) has published its long-awaited guidance regarding the tax treatment of additional benefits granted to pension scheme members when schemes equalise for the effect of unequal (between men and women) Guaranteed Minimum Pensions (“GMP”).
This guidance does not cover GMP conversion, nor the treatment of lump sum and death benefit payments. Further guidance will be issued in due course in relation to these issues.
Annual Allowance and Protection from Lifetime Allowance charge
HMRC notes that, as GMP equalisation relates to benefits that accrued between 17 May 1990 and 5 April 1997, any additional benefits that become payable as a consequence will not count as new benefit accrual, so do not have to be tested against the annual allowance and will not invalidate any lifetime allowance protections. The guidance notes, however, that, if the additional benefit includes any other adjustment (rather than purely for equalisation) Fixed Protection (including 2014 and 2016 Fixed Protection) could be lost.
Scheme members with Primary or Individual Protection should inform HMRC of the amended value of their protected benefits, taking account of GMP equalisation.
Lifetime Allowance charge
Additional benefits arising from GMP equalisation will result in an increase in value of an individual’s benefits which may mean that the individual would qualify for protection from the lifetime allowance charge (but would not have done without such additional benefits), the individual can approach HMRC with evidence to support late notification.
For a member who takes his benefits after GMP equalisation, the value of the equalised benefit will be tested against the lifetime allowance when he takes his benefits or reaches age 75. For a member who has already crystallised his benefits prior to equalisation, the test carried out at crystallisation will have to be corrected to include the additional benefits. This may result in an individual becoming liable for a lifetime allowance charge (or an increase to a charge paid previously).
Backpayments
Schemes may pay backpayments to members as a lump sum as part of the GMP equalisation exercise. The scheme is required to operate PAYE on the lump sum as though it were all income relating to the tax year in which it is paid. However, the amount of tax actually due is calculated on the accruals basis, taking account of the years to which the backpayment relates. Members can contact HMRC to claim the correct tax treatment.