HMRC GMP conversion consultation: Draft regulations appear too narrow

Pension schemes are required to equalise benefits for Guaranteed Minimum Pensions (GMPs). This arises from the High Court judgment in the Lloyds Banking Group case, which set out several different methods trustees could potentially use to achieve equalisation.

One of these is called GMP conversion. It involves removing the rules that relate to GMPs from a pension scheme and modifying the benefits to provide both equality of benefit payments and actuarial equivalence in the benefit package.

There are many potential pitfalls in using GMP conversion. In April 2019 the Department for Work and Pensions (DWP) issued guidance on how GMP conversion could be used to achieve equality. The Pensions Administration Standards Association (PASA) also provided guidance in 2021 on how many of the pitfalls could be avoided but highlighted that pensions tax could still cause problems.

In April 2022 HMRC acknowledged in a Newsletter that using GMP conversion for members who have not yet retired could trigger pension tax issues in both the tax year of conversion and subsequent tax years. HMRC stated: “We need to undertake further work in this area to determine the appropriate outcome and treatment, and the potential for any legislative change.” As a result many trustees have held off using GMP conversion for non-pensioners, awaiting a solution from HMRC. Some have paused projects. Others have only been equalising and converting benefits when members retire.

Today, 8 June 2026, HMRC has published a consultation on draft regulations to address the pensions tax issue, which relates to the Annual Allowance.

Commenting, Alasdair Mayes, LCP Partner, specialist in GMP conversion and pensions tax (and author of the PASA guidance on using GMP conversion) said:

“GMP conversion is a valuable tool for trustees to deliver GMP equalisation for members, but the risk of pensions tax charges has been delaying equalisation for non-pensioners.

“It’s great news that HMRC have brought forward draft regulations seeking to avoid the unintended Annual Allowance issues. A solution is particularly important in current times, with volatile inflation, which can trigger unintended tax charges on members.

“Unfortunately, despite being four years in the making, the draft regulations published today appear to be drafted too narrowly to solve the issue. The proposed “carve out” only appears to cover removing the GMP rules from a pension scheme. Related benefit changes the trustees consider necessary or desirable to facilitate removal of the GMP rules do not appear to be covered. Such benefit changes are necessary to avoid significant reductions in the pension payable to members at retirement – something trustees following the DWP and PASA guidance seek to avoid.

“Hopefully these issues can be addressed as part of the consultation process, so conversion can be used to deliver equality with minimum interference.”