RPSM09105440 - Technical Pages: Member benefits: Lump sums: Other small lump sum payments: Payments under the Financial Services Compensation Scheme

Payments under the Financial Services Compensation Scheme

The Financial Services Compensation Scheme (FSCS) is the UK's statutory fund of last resort for customers of authorised financial services firms. This means that FSCS can pay compensation if a firm is unable, or likely to be unable, to pay claims against it. In general, this is when a firm has stopped trading and has insufficient assets to meet claims, or is in insolvency. The FSCS is an independent body, set up under the Financial Services and Markets Act 2000.

Where a small lump sum is paid by a registered pension scheme by way of compensation under the FSCS, to or in respect of a member, it will be an authorised member payment providing the following conditions are met:

• the ‘small lump sum’ payment does not exceed £2,000 , and
• the payment is made on or after the 1^st December 2009, and
• the payment extinguishes the member’s entitlement to benefits under the registered pension scheme.

The way in which this lump sum is taxed is explained in RPSM09105490.

Payment - Post 5 April 2006 Policies

The tax legislation takes a broad view of what can count as a ‘payment’ by a registered pension scheme, and will include cases where the payment is made directly from an insurer or even directly from the FSCS. This is the case provided the ultimate payment to the member is made ‘in connection’ with the policy that was purchased by the registered pension scheme. The point to note is that the physical payment does not have to be made by the scheme itself (see RPSM04104060).

Payment - Pre 6 April 2006 Policies

Where the policy was purchased before 6 April 2006, the question of whether the payment counts as one from a registered pension scheme will depend on the facts of the case in the light of Article 2 of The Taxation of Pension Schemes (Transitional Provisions) Order 2006.

In practice it is unlikely that compensation payments in respect of many pre 6 April 2006 policies would count as a payment from a registered pension scheme:

• if a compensation payment does not count as a payment from a registered pension scheme, then there can be no question of the payment being unauthorised.
• If a compensation payment does count as a payment from a registered pension scheme, then providing the above conditions for a ‘small lump sum’ are met, the payment will qualify as an authorised member payment.