HMRC's recent Guaranteed Minimum Pension equalisation newsletter clarifies HMRC's views on some of the tricky tax issues that can arise when dealing with GMP equalisation.
Here are our thoughts on what the guidance means for schemes grappling with this issue.
What progress have most schemes made on GMP equalisation so far?
Our experience is that most schemes (unless buying out benefits or winding up) are still in the early stages of GMP equalisation. Many have it on their agenda for H1 of 2022 to make decisions in principle about which equalisation method to adopt. Broadly, the options are:
- adjusting benefits based on a year on year comparison with a member of the opposite sex; or
- a one off adjustment to benefits under GMP conversion legislation, following which the member no longer has a GMP.
Both options can give rise to tax issues, but as a general principle, conversion gives rise to more tax complexity and uncertainty.
Does HMRC's guidance address the tax issues on GMP conversion?
The guidance covers some of the tax issues on conversion, but largely to flag that the problems the industry thought existed do in fact exist. It doesn't provide a solution. So tax issues will still be a disadvantage to the conversion route for schemes looking to carry out a conversion exercise in one go. (Converting only at retirement avoids some issues.)
Top ups to transfer payments
GMP equalisation can also mean schemes have to make top up payments in respect of members who have transferred out. On this issue, HMRC's guidance does provide some helpful clarification on legal grey areas. In particular, HMRC clarifies that it will often be possible to pay a top up payment direct to a member rather than a scheme. For many schemes, transfer value top ups will be in the second phase of their equalisation work after first dealing with equalisation for current members. Schemes currently in the process of winding up or buying out are the ones most likely to find the top up payment guidance useful right now.