Two key points about lump sums in the guidance included:
• For most types of lump sum benefit, where an unequalised lump sum has been paid in the past, Trustees will have a route to pay a top-up to members without adverse tax consequences;
• An exception is some “Trivial Commutations Lump Sum” payments, where a need to equalise could trigger an additional tax charge for some individuals and schemes.
HMRC have also stated that they are unable to provide guidance on conversion, as more detailed work needs to be done on the wider issues associated with that methodology.
Commenting on the guidance, Alasdair Mayes, Partner and Head of GMP Equalisation at Lane Clark & Peacock LLP, said: “It’s great news that trustees will, in many cases, have a clear route through tax rules to equalise past lump sum payments where needed – this is welcome flexibility from HMRC. It’s unfortunate, but not surprising, that some cases could in theory trigger an additional tax charge.”
Alasdair explained: “There was a fear that the need to equalise lump sums paid in the past could make the original payment unauthorised, triggering penal tax charges on lots of individuals with small pension benefits. This guidance limits that risk to a very narrow set of circumstances, which is good news but not the panacea some hoped for.”
Alasdair went on to say: “It’s gravely disappointing that HMRC are not able, after more than a year’s work, to publish guidance on the pensions tax implications of using GMP Conversion to equalise benefits. Many pension schemes intend to use GMP Conversion, as promoted by the Department of Work and Pensions. It would have been really helpful if HMRC could have confirmed the tax treatment, as DWP said they would back in April 2019.”
“We have a good understanding of what we believe the tax implications are, as the law stands. Only last week we completed a whole scheme conversion, having worked through the potential issues, but it would have been really helpful to have the support of published HMRC guidance.”
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