On 20 February, HMRC published its Guaranteed Minimum Pension (GMP) equalisation newsletter addressing some of the tax issues which arise in relation to GMP equalisation. 

Some key points covered by the guidance are:

General

An increase to benefits to comply with GMP equalisation obligations is not a new entitlement, but may impact the amount of previous and future benefit crystallisation events. Changing the form of benefit using GMP conversion legislation can give rise to tax issues.

Annual allowance

An individual who became a deferred member before 6 April 2006 (A-day) and who has remained outside the annual allowance provisions since that date should still remain outside those provisions following equalisation measures.

GMP equalisation adjustments should not stop an individual from falling within the "deferred member carve out" for annual allowance purposes.

Where changes to benefits are made to implement GMP equalisation, there is no need to revisit pension input amount calculations done in the past, but calculations for the pension input amount in the tax year of implementing GMP equalisation and in subsequent tax years will need to take account of the revised amount of benefit entitlement in both the opening and closing benefit amount calculations.

Lifetime allowance protections

A benefit increase solely for GMP equalisation will not be benefit accrual and so should not result in loss of fixed protection, but if the reason for the increase is a mixture of GMP equalisation and other adjustments, then fixed protection could be lost.

GMP equalisation benefit adjustment may mean the rights protected by primary and individual protections are higher than originally notified to HMRC.

For enhanced protection purposes, a GMP equalisation benefit adjustment for a member who became a deferred member before A-day should not result in "relevant benefit accrual" causing enhanced protection to be lost.  However, when carrying out relevant accrual calculations for individuals who have not been deferred members throughout the period since A-day, the value of a member's rights as at 5 April 2006 needs to include the adjustment for GMP equalisation valued at that date.

Lifetime allowance and benefit crystallisation event (BCE) calculations

Where GMP implementation for a pensioner results in an increase to what should have been the pensioner's starting pension at retirement, the original BCE that occurred at retirement requires correction by reference to the revised starting pension, with the test for any lifetime allowance charge being by reference to the individual's remaining lifetime allowance at the time of the original BCE date.

Any increase solely for GMP equalisation will be a correction of an entitlement that has already arisen and does not create a new entitlement for tax purposes.  If the reason for the increase is a mixture of GMP equalisation and other adjustments, this could be a new entitlement for tax purposes.

Where the pension in question started before A-day, the GMP benefit adjustment will not trigger a BCE in the scheme.

Paying the lifetime allowance charge

The Accounting for Tax return in which the original BCE was reported should be amended to reflect the updated amount.  Similarly, any event reports will need to be amended if the value of events reported have changed or the revision to benefits results in further reportable events.

Arrears of pension may be paid to scheme members as a lump sum as part of the GMP equalisation exercise.  The pension payer is required to operate PAYE on the lump sum.

Future developments

The guidance says that HMRC continues to explore GMP equalisation tax issues not covered in the guidance with the GMP industry working group.  This includes the treatment of lump sum and death benefit payments, and HMRC aims to give more guidance on these "as soon as possible", as well as continuing to explore the tax implications for schemes choosing to use the conversion legislation.