HMRC issued the second part of its Guaranteed Minimum Pension (GMP) equalisation guidance on 16 July 2020 ("the HMRC Guidance"). This latest instalment deals with the impact of benefit adjustments on past and future lump sums paid by registered pension schemes. The first part of HMRC's GMP equalisation guidance covering the annual and lifetime allowances was issued in February and is summarised in our blog here.

The HMRC Guidance supplements the existing guidance in the Pensions Tax Manual and we have set out a brief summary of the key points below.

Previous lump sum payments

Certain types of lump sum require that the member's (or dependant's) rights under the scheme are extinguished at the time of payment. If no exception was made for adjustments made for GMP equalisation, any further rights identified due to GMP equalisation would result in the past payment becoming an unauthorised payment. The HMRC Guidance confirms that the reference to extinguishing entitlement to benefits is to "all benefits or rights that could reasonably have been known about at the time of the payment". The lump sum will, therefore, not stop being an authorised payment due to a further entitlement being later identified as a result of GMP equalisation.

Certain types of lump sum also include a limit on the amount of the payment. The HMRC Guidance makes it clear that, for most lump sums, as long as the previous lump sum payment was not more than the relevant payment limit, that lump sum will not stop being authorised because further entitlement is later identified later due to GMP equalisation.

The position is different for Trivial Commutation Lump Sums where, unfortunately, the situation is more complex due to the need to consider benefits across all schemes on the "nominated date". The nominated date is the day nominated by the member which must be no more than 3 months before the first Trivial Commutation Lump Sum payment. As GMP rights were accrued before 6 April 1997, the value of the member's pension rights on the nominated date will always include equalised GMP rights. This may mean that as a result of equalising GMP rights, the value of the member's rights on the nominated date exceeds the relevant limit and could result in additional tax charges in some circumstances.

Future lump sum payments

Does this mean then that previous lump sum payments can be "topped-up" to what they would (or could) have been had GMP equalisation been carried out before the lump sum was paid?

The HMRC Guidance makes it clear that to be an authorised payment, any "top-up" payments to previous lump sums, must satisfy the payment conditions in force at the time the top-up payment is made, not the date of the original lump sum payment. The HMRC Guidance includes additional detail as to how this applies to each type of lump sum. This may mean that a top-up lump sum payment may not be an authorised payment in the same form as the payment it is topping up, but it may be a different form of authorised payment.

Guidance on GMP conversion

One of the key outstanding issues relates to the tax treatment of equalising GMP benefits where the conversion method is adopted. Disappointingly, as with the first part of the HMRC guidance, this most recent HMRC Guidance does not apply to schemes who choose the conversion method to equalise GMP benefits. HMRC states that it is "unable to provide supplemental guidance on conversion, as more detailed work needs to be done on the wider issues associated with that methodology". Based on these comments, it is far from clear when, or indeed if, any further guidance will become available to help schemes in understanding what the tax implications are where the conversion method is adopted.

If you would like to discuss anything raised in this blog, please get in touch with your usual contact at Brodies.


Maureen Burns

Senior Associate