More than 100,000 pension savers could face six-figure tax bills if guaranteed minimum pension requirements were equalised, a Freedom of Information Act request from HM Revenue and Customs shows.
The request from Royal London shows that people with fixed protection against any past cuts in the lifetime allowance for tax-relief purposes could be invalidated if they see an increase in their pension rights.
Following the December 2018 court case brought by Lloyds Bank employees, the High Court rules pension funds need to make changes to eliminate inequalities between men and women as a result of rules around GMPs.
While it could result in modest changes to the amount of pension people will receive, even this could end up invalidating someone’s protection against cuts, landing them with a huge bill from HMRC.
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.
Royal London believes there is a risk that the process of GMP equalisation would count as an accrual, which would invalidate the protection.
The group’s director of policy Steve Webb says: “This issue combines two of the more complex areas of pensions – GMPs and pension tax relief limits. But that combination could result in a catastrophic tax bill for someone who had acted entirely in good faith.
“It is not good enough for HMRC and the Department for Work and Pensions to be discussing this issue and thinking about issuing guidance. Taxpayers need to know where they stand as a matter of urgency.”
If someone’s tax relief limit suddenly fell from £1.8m to the current £1.03m, they could fae a 55 per cent tax charge on the difference, amounting to a bill for £423,500.
Royal London adds: “There is evidence that the government is aware of this problem but has not yet taken action.”
HMRC said: “While we are considering any potential implications of GMP equalisation including on the LTA, it would not be appropriate at this point to confirm whether this is a potential issue. We will publish further information as soon as possible.”
My key observation on GMPs is that although the Lloyds judgment clarified one pretty fundamental question – ‘do schemes have to equalise for the effects of GMPs?’ – it left dozens unanswered.
For example, there are different ways of equalising and it is still not clear yet what DWP will say about the different methods. And how retrospective are the changes likely to be? If I transferred out a few years ago, can I go back and complain that I should have got more? Or did I sign away my rights when I agreed I was getting a full and final settlement? A further issue is that different consultants are currently giving different advice to schemes on what to do, which is creating inconsistencies.
There is an industry working group looking at all of this, but whilst that will help to generate greater consistency, it seems to me that the onus is on the government and regulators to set out what schemes should do and what this judgment means. This needs to involved DWP and HMRC as well as The Pensions Regulator and the FCA.
Without regulators and government providing clarity, schemes, advisers and clients will remain in the dark and will have to make it up as they go along.
Steve Webb is director of policy at Royal London