A High Court ruling made last year on Guaranteed Minimum Pension (GMP) equalisation branded the terms on which final salary schemes benefits work as discriminatory. In a nutshell, the problem arises where men and women in certain final salary schemes accrue benefits at differing rates. As a result of the ruling, the good news is that some scheme members may be entitled to a compensation payment.
However, a seemingly straightforward issue then becomes more complicated where those members have taken steps under HM Revenue & Customs (HMRC) rules to protect their lifetime allowance. That’s because any compensatory payment could be considered to be a further accrual of pension benefits and may consequently invalidate it.
As a reminder, the lifetime allowance places a limit on the total pension benefit that can be amassed over an individual’s lifetime. As the pensions legislation has changed over time, so HMRC have responded by putting special rules in place for anyone with a large pension entitlement. To ensure these people are not disadvantaged these rules afforded them a higher and/or protected lifetime allowance, the loss of which could trigger tax consequences either immediately or on them turning 75.
Further clarification is currently being sought from HMRC on how any compensation payments, relating to pension equalisation, will be treated. In the meantime, if you have an HMRC Protected Lifetime allowance and entitlement to a final salary pension, we would recommend that you contact your Wealth Planner. You should, as a minimum, seek financial planning advice before accepting compensation.
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