GMP equalisation could lead to six-figure HMRC bills

Pedro Gonçalves
clock • 3 min read

More than 100,000 pension savers could face six-figure tax bills if guaranteed minimum pension requirements were equalised, figures from HMRC show.

Freedom of Information Act request from Royal London reveals that "fixed protection" for thousands of savers could be invalidated if they see an increase in their defined benefit (DB) pension rights following the High Court's landmark ruling to equalise guaranteed minimum pensions (GMPs).

British companies are being forced to adjust the pensions of current and former staff as a result of the judgment, which ordered Lloyds to comply with regulations to equalise payments between men and women.

It would be absurd and perverse if a small and unrequested pension boost in response to a court judgment meant that a scheme member suddenly faced a huge tax bill"

When the lifetime allowance for pension tax relief was cut from £1.8m to £1.5m, then to £1.25m and then to £1m, savers who already had high levels of pension savings could "lock in" those higher limits, giving them "fixed protection".

The equalisation of GMPs could mean relatively modest changes to the amount of pension a person will receive. However, even a small change following the equalisation process could invalidate a saver's longstanding protection against past cuts in limits on pension tax relief.

The LTA has been cut from £1.8m in 2010 down to £1m now, and savers who already had high levels in their pension pots were allowed to lock in their higher limits by schemes - known as individual protection or fixed protection.

One condition for fixed protection, however, is that the tax payer does not accrue any further benefits in future. If a person's tax relief limit fell from £1.8m to the current £1.03m, they could face a 55% tax charge on the difference, leaving them with a bill of £423,500.

Royal London believes there is a risk that the process of GMP equalisation would count as an accrual, which would invalidate the protection. Its director of policy Steve Webb stated savers could face this unexpected tax charge at any point unless HMRC takes urgent action.

"This issue combines two of the more complex areas of pensions - GMPs and pension tax relief limits. But that in combination could result in a catastrophic tax bill for someone who had acted in good faith," he said.

"It would be absurd and perverse if a small and unrequested pension boost in response to a court judgment meant that a scheme member suddenly faced a huge tax bill."

In response, HMRC said it was currently "considering the potential tax implications of individuals receiving an increase in their pension, following GMP equalisation" and that it was not appropriate to confirm whether there is a potential issue.

Webb argued: "It is not good enough for HMRC and the DWP to be discussing this issue and thinking about issuing guidance. [Scheme members] need to know where they stand as a matter of urgency."

Trusts fail to reach full tax efficient potential

A high number of trusts are being taxed at rates that are likely unnecessary, according to Canada Life. Newly released HMRC figures reveal that the trustees of some 90,000 trusts paid £445m in tax in 2016/17.

Neil Jones, ican Senior Technical Manager, Canada Life, said: "This is truly unexpected. Trusts are a sound vehicle for passing on wealth to beneficiaries, but to produce this amount of tax means that vital tools like bonds aren't being used in tandem with the trusts. Bonds can allow income tax to be deferred to a more tax advantageous time and may not even be assessed on the trustees.

"The growth may be a reflection of the use of DIY trusts without professional advice. A good professional adviser will be able to work out all allowances and the best way to structure the most appropriate trust. On the face of the evidence, that's not happening and it's making a tax gift to HMRC.    

Chargeable gains are a key area of tax growth for trusts paying tax at the trust rates. These gains in the 2016-17 tax year were almost £1.5bn [£1,460m], a 16% rise on the previous year. At the same time chargeable gains for interest in possession trusts were £1,450m in 2016-17, almost 50% [49%] higher than in 2015-16.