01 March 2021
Gareth Stears and Dave King, pension technical consultants for Aries Insight, outline and comment on a little-known solution
Last November, the High Court finally gave schemes the answer they’d been waiting for (but not the answer they were hoping for) around equalisation of guaranteed minimum pensions (GMPs) that have been transferred out. The court found that transfer values should have reflected equalised benefits, and ceding schemes remain liable for any shortfall.
This creates numerous headaches, one of which is what to do if the scheme the benefits were originally transferred to doesn’t (or cannot) accept the top-up. These amounts will usually be relatively small; more effort than they’re worth. The member may have transferred again. There is a little-known solution to this problem at least.
In the past, it was difficult to discharge relatively small pension liabilities direct to members without falling foul of unauthorised payment charges. Since 2009, though, schemes have had more options – one is an authorised payment where there has been a ‘relevant accretion’.
Relevant accretion occurs where a scheme has either: transferred a member’s benefits to another registered pension scheme or qualifying recognised overseas pension scheme; or, secured a scheme pension or lifetime annuity in the member’s name with an insurance company, and:
- receives a payment in respect of the member that is neither a contribution nor a transfer in, or
- there’s an allocation of funds into the member’s arrangement such that the value of the member’s arrangement is larger than the scheme administrator had believed it to be, or
- (using here the exact wording in the legislation) the scheme administrator becomes aware that the member is entitled to a benefit under the pension scheme, provided:
- the scheme administrator had not been aware of the entitlement before the event in paragraph 2, and
- the scheme administrator could not reasonably have been expected to be aware of it before that event.
The third one might apply, but shouldn’t schemes have been aware before now that they’d have to equalise GMPs eventually?
Fortunately, it’s clear from guidance published in July 2020 that HM Revenue & Customs does not believe schemes could have reasonably known that this additional entitlement would become due.
The guidance in Guaranteed Minimum Pension (GMP) equalisation newsletter says “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.” (http://bit.ly/2JPmqoJ)
When there has been relevant accretion in respect of a member, the scheme can pay a lump sum to that member provided that the payment:
- doesn’t exceed £10,000, and
- doesn’t exceed the value of the relevant accretion (which means that the interest cannot be included; in our view, interest can instead be paid separately as a ‘scheme administration member payment’ (SAMP))
- extinguishes the member’s entitlement to benefits under the scheme, and
- is made no later than six months after the date the ‘relevant accretion’ occurred. (Arguably, scheme administrators became aware and triggered the accretion on the date of the judgment. If so, the deadline for paying these lump sums is 20 May 2021.)
Another condition applies specifically to scheme pension/annuity purchases from insurers since 6 April 2006. The member must have had some lifetime allowance available at that time. (Benefit crystallisation events ‘5’ and ‘5B’ are ignored for this purpose.) This is despite these lump sums not themselves being benefit crystallisation events.
The lump sum is taxed in the same way as a trivial commutation lump sum. So, if the payment represents uncrystallised benefit rights – almost certainly the case – 25% of the payment is free of income tax. The rest is chargeable to income tax as pension income.
If the lump sum is paid to someone else, perhaps the member has since passed away, it is instead taxed in the same way as a trivial commutation lump sum death benefit (i.e. the entire payment is chargeable to income tax as pension income).
The interest in the form of a SAMP is also chargeable in full to income tax as pension income.
We don’t envy trustees and administrators the job of dealing with the fallout from this judgment. Perhaps being aware of this option will solve at least one problem. Nonetheless, you’ll have to move fast if you don’t want to be left with a tiny liability and a big headache.
Featured in the February 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.