On 20 February 2020, HMRC finally published its long awaited guidance on some of the tax issues associated with implementing GMP equalisation. While the guidance provides helpful clarity in some areas, its scope is limited and it leaves a lot of significant questions unanswered.

In particular, the guidance does not address the tax consequences of implementing GMP conversion (an approach many schemes are considering) or those connected with the payment and correction of lump sums or death benefits. As such, the guidance is likely to be of limited assistance to trustees and the absence of guidance on many key areas is likely to lead to further delays before most schemes feel comfortable to go ahead and equalise members’ benefits.


As we have previously reported (see links at the end of this bulletin), the High Court ruled in the Lloyds Bank judgment on 26 October 2018 that trustees of defined benefit schemes are required to equalise male and female members’ benefits for the effect of guaranteed minimum pensions (GMPs).

Since then, many trustees and sponsors of affected schemes have been considering how best to equalise benefits in the context of their scheme. However, few schemes have implemented equalisation to date. This is largely due to the uncertainty that still exists in several areas – much of which relates to the tax consequences for individual members of equalising their benefits.

Many schemes have delayed taking definitive action to equalise members’ benefits pending guidance from HMRC. However, whilst the guidance published on 20 February 2020 provides some assistance, its scope is limited and it fails to address many of the questions that trustees are contending with.

HMRC guidance – what does it cover?

1. Equalisation but not conversion

There are different methods of implementing GMP equalisation, including the dual record keeping (or year-by-year) approaches approved by the High Court in the Lloyds Bank judgment and GMP conversion. Unfortunately, HMRC’s guidance only covers tax issues connected with a dual record keeping approach. It does not cover equalisation exercises using the statutory conversion method.

The guidance also only covers circumstances where the reason for a benefit adjustment is solely to equalise for the effect of GMPs. It doesn’t cover adjustments made for other reasons, such as changes made to simplify benefits as a result of implementing GMP conversion or changes connected with implementing GMP reconciliation. This means that where GMP equalisation is being carried out alongside any other exercise (e.g. GMP reconciliation) it should be done separately (or, as a minimum, sufficient records should be kept to identify which exercise different elements of any adjustments made relate to).

The fact that the guidance does not cover the tax issues associated with GMP conversion is disappointing because many schemes are considering this option and, even if schemes don’t end up opting for conversion, trustees want to be able to compare the merits of conversion compared with the alternative dual record keeping approach.

In addition, although the guidance says that it does not cover GMP conversion it, rather unhelpfully, raises some significant potential risks associated with adopting this approach, including the potential for members to lose the benefit of the deferred member carve-out and/or fixed protection. This is likely to make trustees very nervous about going down this route, without a compelling reason, until HMRC issues further guidance. This is likely to take some time.

The fact that the guidance only covers dual record keeping approaches also means that it is only directly relevant to ongoing schemes (and even some of those schemes might not choose to use dual record keeping). The guidance will, in particular, be of little value to schemes that are looking to secure benefits with an insurance company (where conversion is likely to be the preferred method). We understand the lack of guidance from HMRC in this area may be delaying some schemes from winding up, and we expect this will continue to be the case until HMRC publishes further guidance.

2. GMP equalisation is not a new entitlement

A significant question which this guidance does address, is the question of whether any increase resulting from a GMP equalisation adjustment is treated as a new entitlement or not. The answer to this question is significant as it determines the outcome of many of the other tax related questions that implementing GMP equalisation (and conversion) raises, including the treatment of any increase in benefits for annual allowance purposes and the potential loss of lifetime allowance protection for some members.

The view taken by HMRC on this issue is that “any increase to the amount of a pension due at retirement [as a result of GMP equalisation] is not a new entitlement as the increase results from membership of a pension scheme in the period 17 May 1990 and 5 April 1997”.

3. Annual allowance

In relation to the annual allowance, HMRC has confirmed that in its view:

  • an individual who became a deferred member before 6 April 2006 under an arrangement and who has remained outside of the annual allowance provisions since that date in relation to that arrangement should remain outside of those provisions on the basis that GMP equalisation benefit adjustments should not result in any benefit accrual after 5 April 2006;
  • a deferred member who is otherwise within the annual allowance deferred member carve out (DMCO) in relation to an arrangement should remain within the DMCO even where an adjustment is made to their benefits to equalise for the effect of GMPs, and
  • past annual allowance calculations do not need to be revisited. In addition, the opening and closing value of a member’s benefits in the tax year that equalisation is implemented should both be adjusted to reflect the revised amount of a member’s benefit entitlement.

The guidance on these points is helpful, in as far as it goes. In particular, the fact that a GMP equalisation adjustment will not be tested against the annual allowance is welcome.

However, the guidance in relation to the DMCO fails to address several areas of concern. In particular, questions remain as to whether the DMCO may be lost where a member’s GMPs are converted into ordinary scheme benefits.

4. Lifetime allowance protection

Some individuals have registered for protection against the lifetime allowance charge. There are several types of protection available, and these can be lost in various circumstances (depending on the type of protection), including for certain types of protection where an individual has further ‘benefit accrual’.

HMRC issued the following specific guidance in relation to these:

  • Individual and primary protections – These will not be lost if benefits increase as a result of a GMP equalisation adjustment. However, the adjustment for equalisation could mean that the value of the rights protected are different than originally notified to HMRC. HMRC asks these individuals to notify it of the revised value of their protected benefits without undue delay. Trustees should consider informing their scheme’s members of the need to do this.
  • Fixed protection (FP, FP14 & FP16) – Any individual who otherwise has fixed protection should retain this.
  • Enhanced protection – For individuals who have been deferred members since 6 April 2006 any GMP equalisation benefit adjustment should not be ‘relevant benefit accrual’, meaning they will retain their enhanced protection. However, individuals who have not been deferred members since 6 April 2006 will have accrued benefits that with any GMP adjustments may result in ‘relevant benefit accrual’ meaning protection could be lost. When carrying out the relevant accrual calculations, the value of the members’ rights under the arrangement as at 5 April 2006 needs to include the adjustment for GMP equalisation valued at that date.

Once again, this clarification is helpful, but only as far as it goes. In particular, the statement relating to the potential loss of enhanced protection for individuals who have not been deferred members since 6 April 2006 raises more questions than it answers. For example, it is unclear from HMRC’s guidance why an individual may lose protection in these circumstances given HMRC’s general view that any adjustment is treated as part of an individual’s pre-5 April 1997 entitlement. It is also not clear how this will operate in practice. Therefore, further guidance from HMRC is needed on this point. In addition, if the reason for any increase is a mixture of GMP equalisation and other adjustments, an individual’s lifetime allowance protection may also still be lost.

Where GMP equalisation benefit adjustment results in an increase in the value of an individual’s benefits, meaning the individual would qualify for protection from the lifetime allowance charge, the guidance indicates that the individual may be able to apply for late registration for the relevant protection. Individuals in this situation should contact HMRC as soon as possible with evidence to support their late notification.

5. Lifetime allowance – BCEs

HMRC has indicated that, where a member is already in receipt of a pension which started on or after 6 April 2006, it will be necessary to correct the original benefit crystallisation event (BCE) 2 calculation (i.e. the calculation of the value of the benefits to be tested against the lifetime allowance at the point the pension came into payment). The same applies in relation to BCE5. It will also be necessary to revisit (where relevant) any notional BCE as at 5 April 2006 and any subsequent BCEs that have occurred in respect of the member. Affected members will also need to be issued with an updated BCE statement.

Revisiting historic BCEs and issuing updated BCE statements may create a significant administrative burden for schemes (and will require careful member communication). Trustees should speak to their administrators about the practicalities of doing this.

In line with HMRC’s general approach, any increase solely related to GMP equalisation will be a correction of an entitlement that has already arisen and does not create a new entitlement for tax purposes. If the reason for any increase is as a mixture of GMP equalisation and other adjustments this could be a new entitlement for tax purposes.

Where the recalculated BCE results in a member exceeding the lifetime allowance, a charge will be due. This means that some members could find themselves with a tax bill following an equalisation exercise (although in most cases it is likely to be small).

Scheme members may need to correct a previous Self Assessment tax return if an annual allowance charge has changed or now applies.

6. Arrears of pension

Arrears of pension may be paid to a scheme member as a lump sum as part of a GMP equalisation exercise. The guidance confirms that schemes are required to operate PAYE on any such lump sum payment. However, it notes that the amount of pension income charged to tax is the amount of the pension the member is entitled to in the relevant tax year (on the accruals basis). Tax may also be due on any interest that is paid on arrears of pension.

Where the amount of tax deducted under PAYE is more than the tax due on the accruals basis members should contact HMRC to claim a refund.

What next?

Although HMRC’s guidance is helpful in some respects, its limited scope means that it leaves many important questions unanswered. Most concerning for many schemes will be the fact the guidance does not cover GMP conversion. This is a significant omission and it is unclear when, or indeed if, further guidance will be issued on this.

HMRC has said that it will issue more guidance on the treatment of lump sum and death benefit payments “as soon as possible”. However, no specific timetable is given.

The impact of these tax issues is potentially very significant for affected individuals, which makes these omissions and further delays very unfortunate.

As a result, far from opening the way for schemes to implement GMP equalisation, we expect that many schemes will continue to delay taking definitive action, unless there is a compelling reason to do so, pending further guidance and clarifications from by HMRC.