HMRC to address GMP conversion tax issues ‘in the coming weeks’

Though the Pensions Administration and Standards Association has published guidance around conversion, the industry has long called for more input from HM Revenue & Customs, especially around the tax implications. 

GMP conversion can trigger annual or lifetime allowance charges where a member’s pension is uplifted, potentially incurring significant costs.

In our view, to navigate a simple path through these issues, legislative change would be needed. The challenge is that these are complex areas and there isn’t necessarily a straightforward fix that avoids further unintended consequences

Tom Yorath, Aon

The bill, currently progressing through the House of Lords, was introduced last year by Margaret Ferrier MP, formerly of the Scottish National Party. Its aim was to clarify and streamline the conversion process, as well as to clarify the minimum survivor’s pension required, and remove the need to notify HMRC when a conversion exercise is carried out.

It received cross-party support, but the government, responding to questions in March, would say no more than that it would “work closely” with HMRC around the “wider issues” around GMP conversion.

Pensions minister Guy Opperman, responding in writing to questions from shadow pensions minister Matt Rodda, explained that the bill merely clarified existing legislation and tweaked technical details, and did not entail any significant legislative change.

New guidance and legislation forthcoming

Rounding off the second reading debate in the House of Lords, Baroness Stedman-Scott, a minister at the Department for Work and Pensions, praised the bill for achieving its intended effects.

On the question of the tax implications — not covered in the bill — she said HMRC would publish supplementary guidance “in the coming weeks on the tax implications of conversion, as well as highlighting to industry where tax issues could arise for certain types of member”.

She added that HMRC is working with the industry, the DWP and HM Treasury “to determine the appropriate outcome and treatment for those affected by conversion, as well as the scope and timing for any legislative changes”, and that the 2019 guidance around conversion will be updated following the passage of the bill.

Current bill ‘isn’t enough’

Anna Rogers, senior partner at Arc Pensions Law, told Pensions Expert that the bill “looks hopeful”, but added that even if it becomes law it “isn’t enough”.

“The details will be in regulations and further consultations will be needed to work out what those should say. One big unknown is how can we find a practical way of protecting the current rights of spouses and civil partners without maintaining shadow GMPs? And it will take primary legislation to fix the tricky tax issues for deferreds,” Rogers said.

“One tax problem is that GMPs often revalue in deferment at a higher rate than the rest of the pension. If you want to get rid of GMPs you have to rebase the pension at the date of leaving, and give value for the revaluation you’re taking away. So it looks like the pension has gone up because the amount at leaving has gone up even though the amount at retirement should come out the same.  

“Another niggle is that converting causes the ‘deferred member carve-out’ to be lost. The way the [deferred member carve-out] is written in the Finance Act ignores GMPs. That means the bit that was GMP is treated as new pension,” she continued. 

“In the end it shouldn’t matter, because you only have to measure changes in the total pension but having to measure it makes admin more complicated.”

Rogers added that there are issues for high earners as well, such as anti-avoidance provisions that apply if new benefits are granted. 

“It isn’t fair to trigger tax penalties when people are only getting the value of what they were already entitled to,” she said.

“Pensions tax legislation is already complicated enough, but these glitches should be sorted out because for some schemes they are getting in the way. GMP solutions vary between schemes, but the industry wants the full range of options to be available so that we can fix the historic sex discrimination issue once and for all.”

Aon partner Tom Yorath concurred, telling Pensions Expert there are “numerous tax challenges that arise from converting benefits”, though the main focus “tends to be on GMP conversion giving rise to tax charges even where members are no longer accruing benefits in their scheme — and even where conversion will not give them a benefit of greater value”.

“These charges can happen either through the loss of the deferred member carve-out, which can give rise to annual allowance charges in the year of conversion or afterwards, or — in a worst-case scenario — the loss of protections against the lifetime allowance,” he explained.

“In our view, to navigate a simple path through these issues, legislative change would be needed. The challenge is that these are complex areas and there isn’t necessarily a straightforward fix that avoids further unintended consequences.”

Yorath continued: “This doesn’t mean conversion is impossible, far from it. At present, we have more than 100 schemes looking at GMP conversion, and those that have made the best progress are using practical workarounds to sidestep some of these issues.

“Indeed, we are almost four years after the Lloyds judgment requiring schemes to equalise and most want to get on with fixing this problem now, rather than waiting for legislative change that may or may not come.”