Introduction
In this newsletter we’re providing guidance to supplement the existing guidance in the Pensions Tax Manual (PTM) relating to benefit adjustments for registered pension schemes with periods of contracted out pensionable service between 17 May 1990 and 5 April 1997.
The judgment in the Lloyds case considered a number of methods by which pension scheme benefits might be adjusted for Guaranteed Minimum Pension (GMP) equalisation. There’s no single method by which pension schemes can equalise benefits for the effect of GMPs and it is for the trustees and employers of each pension scheme to decide what method is most appropriate for their scheme. HMRC cannot comment on the choice of methodology.
This guidance relates to adjustments where the reason for the adjustment is solely for GMP equalisation. It does not cover other benefit adjustments, if any, which occur at the same time or as a result of GMP conversion. There is a further update on GMP conversion at the end of this newsletter.
If pension schemes have started to pay pensions and made lump sum payments, further payments may be due if schemes find that benefits have been underpaid due to GMP equalisation. This guidance covers tax issues in respect of lump sums previously paid and the payment of lump sums as a result of GMP equalisation.
Previous lump sum payments
Whether or not a lump sum payment is authorised depends on whether the payment conditions that applied at the time of the payment have been met.
Requirement to extinguish rights
The payment conditions for the following types of lump sum include a requirement to extinguish the member’s (or
dependant’s) rights under the scheme (or arrangement as appropriate):
- serious ill health lump sum
- trivial commutation lump sum
- lump sums paid under either regulation 11 or 12 of SI 2009/1171 (‘small lump sums’)
- winding-up lump sum
- trivial commutation lump sum death benefit
- winding-up lump sum death benefit
The reference to extinguishing the member’s (or dependant’s) entitlement to benefits is to all the benefits or rights that could reasonably have been known about at the time of the payment. The lump sum will not stop being an authorised payment purely because, due to GMP equalisation, further entitlement is later identified that the scheme administrator could not reasonably have known about at the time of the lump sum payment. This reflects the exceptional circumstances associated with GMP and applies once the scheme administrator adopts their chosen GMP equalisation methodology.
Payment limits
The payment conditions for the following types of lump sum include a limit on the amount of the payment:
- lump sums paid under either regulation 11 or 12 of SI 2009/1171 (‘small lump sums’)
- winding-up lump sum
- trivial commutation lump sum death benefit
- winding-up lump sum death benefit
The exact limit depends on the date the lump sum was paid. For example, the limit on small lump sums paid before 27 March 2014 was £2,000. The limit for such lump sums paid on or after that date is £10,000.
The limit applies to the amount of lump sum actually paid. As long as the previous lump sum payment was not more than the relevant payment limit, that lump sum will not stop being an authorised payment purely because, due to GMP equalisation, further entitlement is later identified.
The situation is different for a trivial commutation lump sum. Instead of a limit on the amount of the lump sum payment, the limit is based on the value for the member’s pension rights under all registered pension 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. If the member does not make a nomination the nominated date is the date of payment of the first trivial commutation lump sum payment from any registered pension scheme.
The limits on the value for the member’s rights on the nominated date are as follows:
- nominated date 6 April 2006 to 5 April 2012 – 1% of the standard lifetime allowance
- nominated date from 6 April 2012 and first trivial commutation lump sum payment from any registered pension scheme paid before 27 March 2014 – £18,000
- where the first trivial commutation lump sum payment from any registered pension scheme was made on or after 27 March 2014 – £30,000
GMP rights were accrued before 6 April 1997, so the value of the member’s pension rights on the nominated date includes the ‘equalised GMP’ rights. This is consistent with the position for valuation of rights for annual and lifetime allowance purposes.
It may be that as a result of equalising GMP rights the value of the member’s rights on the nominated date is found to be more than the relevant limit. If this is the case the original lump sum payment cannot be a trivial commutation lump sum. Unless the lump sum can meet the payment conditions for another type of authorised payment, for example a small lump sum, the payment will be unauthorised.
Future lump sum payments
Where benefits have previously been paid, depending on the circumstance, a further lump sum payment may be an authorised payment. Any payment, including ‘top-up’ payments to previous lump sums, must satisfy the payment conditions in force at the time the payment is made.
Where a scheme is considering making a ‘top-up payment’ this means the payment conditions in force at the time the ’top-up’ payment is made, not the date of the original lump sum payment. This may mean that a top-up lump sum payment cannot be an authorised payment, or it is another form of authorised payment. For example, a top-up payment to a trivial commutation lump sum originally paid in 2015 cannot be a trivial commutation lump sum but it may be payable as a ‘small lump sum’ if the relevant payment conditions are met.
Authorised lump sums that are taxable are subject to tax in the tax year that the lump sum is actually paid. For the avoidance of doubt, where the payment is a top-up payment this is the date the top-up payment is made, not the date of the original payment.
For the following types of lump sum to be authorised payments, they must be paid to the member. It is not possible for these lump sums to be authorised payments if they are paid following the member’s death:
- pension commencement lump sum
- serious ill health lump sum
- trivial commutation lump sum
- winding-up lump sum
Pension commencement lump sums
Pension commencement lump sums (PCLS) can be paid in stages, that is, a PCLS does not need to be a single payment. However, one of the conditions for a payment to be a PCLS is that the payment must be made within the period beginning 6 months before and ending one year after the member becomes entitled to it.
A member becomes entitled to the PCLS immediately before they become entitled to their scheme pension. This means that if the member became entitled to their scheme pension more than 12 months ago, the pension scheme cannot pay a further PCLS.
You can find guidance on the conditions for paying a PCLS at PTM063210.
Where payment of a further PCLS is possible the BCE 6 will need to be recalculated, and a revised benefit crystallisation event (BCE) statement given to the member.
Serious ill health lump sums
You can find guidance on the conditions for paying a serious ill health lump sum at PTM063400. To be authorised the payment must:
- be to the member
- be in respect of an uncrystallised arrangement
- extinguish the member’s benefit entitlement under that arrangement
Scheme administrators should be aware of the requirement to equalise GMPs and which members are potentially affected by this requirement.
When schemes have chosen their method of equalising GMP, this will need to be taken into account in calculating and paying the lump sum. Scheme administrators should note the requirement is to extinguish rights under an arrangement not under the whole scheme.
A member may have a number of different arrangements under a scheme, as the scheme may use different arrangements to provide different types or tranches of benefit. It is up to scheme administrators how they structure their scheme.
Trivial commutation lump sums
You can find guidance on the conditions for paying a trivial commutation lump sum in PTM063500.
This includes conditions requiring:
- that a payment extinguishes the member rights under the scheme – scheme administrators should be aware of the requirement to equalise GMPs and which members are potentially affected by this requirement – when schemes have chosen their method of equalising GMP, this will need to be taken into account in calculating and paying the lump sum
- the lump sum to be paid within ‘the commutation period’ – this is a period of 12 months beginning with the day the member is first paid a trivial commutation lump sum by any registered pension scheme
This means that if any registered pension scheme has paid a trivial commutation lump sum to a member and the first such payment was more than 12 months ago no further payment of a trivial commutation lump sum to that member is possible.
Small lump sums under regulations 11 or 12 SI 2009/1171
Regulations 11 and 12 of the Registered Pension Schemes (Authorised Payments) Regulations 2009 – SI 2009/1171 authorise lump sum payments of up to £10,000. You can find guidance on the payment conditions for these lump sums at PTM063700.
From a tax perspective, there’s no requirement for the lump sum to be paid to a member. These provisions may be used to pay a lump sum following the death of a member. Neither is there a time-frame in which the payment must be made.
Schemes with members with GMPs are likely to be larger pension schemes capable of making payments under regulation 12. For such schemes, unlike payments under regulation 11, there’s no requirement to consider the value of pension rights held under other pension schemes.
Scheme administrators may consider using regulation 12 to pay a further lump sum to extinguish the members rights where:
- further benefits have been identified as payable to a member
- the value of their total rights under the scheme is not more than £10,000
Scheme administrators should be aware of the requirement to equalise GMPs and which members are potentially affected by this requirement. When schemes have chosen their method of equalising GMP, this will need to be taken into account in calculating and paying the lump sum.
Defined benefits lump sum death benefit
Payment of a further lump sum death benefit may be due as a result of GMP equalisation. You can find guidance on the conditions for paying a defined benefits lump sum death benefit at PTM073100.
The lump sum will be taxable regardless of the age of the member when they died if a further payment of a defined benefits lump sum death benefit is made more than 2 years after the date the scheme administrator:
- first knew of the member’s death
- could reasonably have been expected to have known of the member’s death
You can find guidance on the tax treatment at PTM063210.
Trivial commutation lump sum death benefit
There is no time limit for paying this type of lump sum. Where further dependants’ scheme pension is identified for a dependant, the scheme administrator may consider commuting that pension within the payment terms for this type of lump sum. You can find guidance on the conditions for paying a trivial commutation lump sum death benefit at PTM073700.
Other guidance on GMP equalisation
You can find more guidance on GMP equalisation in the Guaranteed Minimum Pension (GMP) equalisation newsletter – February 2020. This guidance covers:
- annual allowance, including deferred member carve-out
- lifetime allowance, including fixed, primary, individual and enhanced protection
GMP Conversion
The guidance in this newsletter does not apply to the conversion method. The position regarding conversion is complex and its effects within the pension tax rules may have wider impacts. For example, there may be implications when testing against the annual allowance, or whether the deferred member carve out applies, or where an individual has a lifetime allowance protection.
HMRC is unable to provide supplemental guidance on conversion, as more detailed work needs to be done on the wider issues associated with that methodology. Any schemes wishing to use the conversion method should consider any tax implications that may arise in accordance with the existing legislation and guidance within the PTM and seek advice as appropriate.
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