GMP Equalisation - Lifetime Allowance Charge

JamesRobinson48

I’d be grateful for help from anyone with expertise in HMRC’s Lifetime Allowance (LTA) Charge in relation to GMP equalisation.  Sorry it's a long post, please bear with me.

I am a male current pensioner in a DB scheme. I've had a letter from my Scheme Trustees stating that I’ll receive a back pay lump sum of £30, plus interest, because cumulatively (since retiring in 2017) I’ve been fractionally underpaid relative to a notional equivalent female retiree. This was calculated using the ‘dual record keeping approach’. The annual back pay starts at £8 for the tax year 2017/18, then decreases steadily to £2 for 2021/22, £1 for 2022/23, and £0.04 for 2023/24.  Given that trajectory, I imagine there are unlikely to be any future equalisation payments.

I’ll receive the above £30 in my next payslip, less 40% income tax.  So far, so good.

My problem is that the total value of my pension crystallised in 2017 exceeded my LTA under Fixed Protection at the time, so I paid an LTA Charge then. That LTA Charge was calculated by the Scheme, paid by the Scheme to HMRC, and recovered from me as a reduction to my PCLS.

I believe the Scheme should now calculate a further LTA Charge, pay it to HMRC, and recover that amount through my PAYE. I gather this new LTA charge is to be calculated using a 25% tax rate applied to twenty times the increase in the starting pension.  See links at foot of this post.

In my case, £8 * 20 * 25% = £40 tax to pay.  Of course, this minimal £40 tax exceeds the minimal back pay lump sum that I’m to receive, but never mind, I just want to report to HMRC correctly.

The letter from my Scheme does not mention any LTA Charge. I don’t know whether that’s because there is nothing to pay; or possibly they’re washing their hands of it and leaving pensioners  to deal with HMRC. They know very well that I’m over the LTA already.

My questions:

·         Is the Scheme supposed to calculate this new LTA charge and disclose the amount to HMRC and myself? If not, how may I go about calculating it?  Am I on the right lines above (£40) or, alternatively, is it apparent that there is nothing to pay?

·         Is the Scheme supposed to account for the LTA charge to HMRC and recover it from my payslip? Or is the onus on me to settle up with HMRC direct?  If so, what is the best HMRC form or phone number for that?

·         Do I need to approach HMRC myself at this time, and if so, what information should I have ready to give them?  What is the deadline for that?

Thanks in advance for any relevant insights.

 

HMRC GMPE newsletter, 20 February 2020, see sections 5 & 6

https://webarchive.nationalarchives.gov.uk/ukgwa/20240105143717/https://www.gov.uk/government/publications/guaranteed-minimum-pension-gmp-equalisation-newsletter-february-2020/guaranteed-minimum-pension-gmp-equalisation-newsletter-february-2020#lifetime-allowance-and-bce-calculations

PASA GMPE working group guidance on tax issues, 12 February 2021, see section 5

https://www.pasa-uk.com/wp-content/uploads/2021/02/Final-Draft-GMPEWG-Tax-Guidance-12-Feb-2021.pdf

FIREDreamer

Lifetime Allowance was abolished by Jeremy Hunt in 2023.

As you arent getting any extra PCLS I don’t think there is anything to consider here.

leosayer

Seeing as the scheme has previously made the calculation and payment, why don't you ask them to do the update?

I would be wording the question in a way that makes it clear you expect them to do this unless they tell you otherwise.

JamesRobinson48

FIREDreamer said:

Lifetime Allowance was abolished by Jeremy Hunt in 2023.

As you arent getting any extra PCLS I don’t think there is anything to consider here.

Sadly that is not the case for retroactive pension increases triggered by GMP Equalisation.

FIREDreamer

JamesRobinson48 said:

FIREDreamer said:

Lifetime Allowance was abolished by Jeremy Hunt in 2023.

As you arent getting any extra PCLS I don’t think there is anything to consider here.

Sadly that is not the case for retroactive pension increases triggered by GMP Equalisation.

Ok I stand corrected. Thank you.

GMPEqCommenter

[Disclaimer: I am not a tax expert, nor am I an expert on all of the various admin processes involved. I have however been involved in throwing ideas around trying to solve similar issues previously, albeit usually for larger amounts of money.]

My understanding is that both you and the Scheme are jointly liable to ensure that the LTA tax charge is paid, but in practice HMRC is only really set-up to receive the payment from the Scheme, not the individual member. So it needs to be the Scheme liaising with HMRC, not you directly; however, the actual money needs to come from you - if the Scheme pays it itself without reducing your benefits to compensate, that counts as an extra benefit which is itself taxable, so it costs more.

Ultimately exactly how this is going to work is something you'll need to discuss with the administrators, as it will depend on what they can actually handle and consider proportionate. Options include:

• In an ideal world, the tax charge would be smaller than the backpayment, and they'd reduce the backpayment by the corresponding amount before paying you the rest of the money. This obviously won't be possible here.
• Failing that, they'd reduce your current pension in payment by an amount equal in value to the tax charge, but to no more than the value of the equalisation uplift (because you're not meant to reduce pensions in payment, but you can give less of an uplift). Given you said you had a current uplift of ~£0.04 (or possibly nil), this isn't going to work in your circumstances either
• They could backdate a reduction to your pension at retirement. This probably would work, but is quite a faff to calculate, especially for £40.
• They could possibly get you to send them a cheque for the £40 made out to HMRC and pass it on (this may or may not work with their admin processes).
• They could just pay the £40+additional tax uplift directly from the Scheme to HMRC and not bill you anything. This will mean a larger payment to HMRC, but the extra charge is going to be lower than the admin cost of some of the more complicated options.

If they have other members in similar situations they may well want to take a consistent approach for all of them, so they may not go for the optimal approach when considering you in isolation. Or they could apply a materiality threshold and do different things above and below it.  

Basically, talk to your administrator. I'm afraid I can't remember what the timescales required are.