| Key Points: The Guidance is useful, but must be read in context In particular, scheme trustees must consider their legal duties |
Introduction
HMRC’s April 2022 Guidance on GMP equalisation is helpful on the tax treatment of topping – up original transfers when a top-up is needed to equalise gmps. However, it does not mention scheme trustees’ legal duties as to choosing between:
- Paying the transfer top-up payment to a receiving scheme; OR
- Paying the top-up to the member directly.
Nor, in giving limited pointers on the tax treatment of GMP conversion, does the HMRC Guidance mention continuing legal concerns about conversion.
Top-Up Transfers – back to basics
- A little over 30 years ago, on 17th May 1990, the European Court decided in the ‘Barber’ case that pension benefits for male and female members must be equalised for benefits accruing from 17th May 1990;
- Nobody knew whether the ‘Barber’ decision also required GMP benefits for the period 17 May 1990 to 6th April 1997 to be equalised; and
- Wheels grind slowly and it was not until the “Lloyds” case in 2018 that the High Court answered ‘yes’ relevant GMPs must be equalised. The Court ruled on how to equalise but left open how to achieve this for past transfers – out containing GMPs. The further “Lloyds” High Court decision on 20th November 2020 ruled on this (“Lloyds Transfer Decision 2020”).
Lloyds Transfer Decision 2020
The Court mainly focused on statutory transfers, being transfers to which members having a statutory right under pensions legislation and our comments below are in the context of statutory transfers; different considerations may apply to non-statutory transfers and bulk transfers. Simplifying greatly, in the Lloyds Transfer Decision 2020 the Court decided as follows:
| Question | Answer |
| Are scheme trustees obliged in principle to pay a top-up transfer to the trustees of the scheme which received the original transfer? | Yes |
| Can the trustee instead require a member to accept direct payment of a residual benefit? Can a member so require? | No, in both cases, but by agreement direct payment may be possible in some circumstances. For instance, the scheme receiving the original transfer may have wound up, or may have refused to accept a top -up transfer. |
Before considering HMRC Guidance, scheme trustees first need to decide whether consistently with their legal duties they can make a direct payment to the member if they wish to. Legal advice is essential in this area and relevant matters will include the comments made by the Judge in the Lloyds Transfer Decision (see the above box) as well as relevant legal principles including the principle of ‘de minimis’ (small amounts).
HMRC’s April 2022 Guidance
HMRC’s views on the tax treatment of top-ups is in summary:
(1) Payment of a top-up transfer to another registered pension scheme or paying residual pension benefits as a lump sum direct to a member can both be authorised payments for Finance Act 2004 purposes and so as not to incur unauthorised payment tax charges. However, payment as a lump sum direct to the member will be an authorised payment only if it falls within one of the relatively narrow categories permitted for smallish lump sums under Finance Act 2004 (as described in more detail in the April 2022 Guidance);
(2) Tax catch for top-ups paid to another scheme: HMRC’s Guidance makes it clear that top-ups are treated as authorised payments only if the original transfer was a ‘recognised transfer’ under Finance Act 2004, being a transfer made on or after 6th April 2006. However, many transfers containing GMP rights will have been made prior to April 2006. Representations are being made to HMRC to change their rules to embrace pre – 6 April 2006 original transfers, but a speedy reply is not expected and legislation may be needed to solve this problem;
(3) There are no annual allowance implications on payment of top – up transfers to another scheme, or on payment of a lump sum direct to the member to extinguish the right to a top -up transfer payment;
(3) Payment of a top-up transfer/lump sum direct to the member may imperil certain member protected rights and advice may be needed on this; and
(4) Taxation of lump sums paid direct to the member – although if the relevant conditions are met, lump sum payments are authorised payments (see (2) above), the lump sum remains taxable on the member in the usual way. Where the payment is to the member, tax will be due on 75% of the lump sum but not on the remaining 25%. Tax is due in the tax year of payment of the lump sum and PAYE should be operated.
Finally – HMRC’s April 2022 Guidance on GMP Conversion
HMRC emphasise they need to do further work before giving their views, however the Guidance does contain limited comments about the annual allowance, the lifetime allowance and lifetime allowance protections.
Perhaps not unsurprisingly being tax Guidance, HMRC do not mention the wider legal picture regarding GMP conversion. The state of play is as follows:
- Pension Schemes (Conversion of GMPs) Act 2022 (“Conversion Act”) (Royal Assent 28th April 2022);
- Conversion Act not yet in force;
- Will come into force once Regulations made; and
- No sign yet of the Regulations; Government has promised fully to consult on draft Regulations.
The legal path to conversion will be smoothed once the Conversion Act and the Regulations are in force, but as explained above we are not there yet. This does not prevent schemes and their legal advisers considering whether GMP conversion may be suitable for a scheme and how conversion would be implemented, but final decisions may need to await the Conversion Act and Regulations coming into force and for HMRC to complete their homework and issue further Guidance on the tax treatment of conversion.
We hope the above high level comments are helpful but if readers have any queries, please get in touch.
Clive Weber, Consultant, Pensions and Employee Benefits Team