IFAs investigated after multi-thousand pound pensions now worth £1
Investors are being warned to be vigilant before transferring their pensions and investing in unregulated products, as law firm Hugh James takes on 300 cases of mis-sold self-invested personal pensions (Sipps).
The investors have seen the value of their Sipps fall from hundreds of thousands to little more than zero, after being advised to move their money into the ‘highly speculative’ Harlequin property investments.
In each case the investors were encouraged by unscrupulous independent financial advisers (IFAs) to transfer their workplace or private pension into the extremely high-risk investments. Victims were often cold-called and promised that returns would beat their existing investments.
Malcolm Evans, a partner at Hugh James explains: “The bulk of the cases involve transfers between 2009 and 2012 which were linked to highly speculative investments in Caribbean property developments managed by construction company Harlequin Hotels and Resorts. It is estimated that over £400m was channelled to Harlequin from UK pension funds with investors, in many cases, persuaded to part with tens of thousands of pounds.”
“Shockingly, many investors lost all their pension funds as a result of investing in these unsuitable products and many are now seeking compensation against the IFAs who should have made customers aware of the very high risks associated with these unregulated investments,” says Mr Evans.
Pensioner hit by life-changing £95,000 loss
One victim, Carol Price, 55, from Hastings was advised to move her £75,000 final salary pension into an investment in Harlequin Hotels and Resorts back in 2011. However, shortly after she made the transfer she discovered the investment was worthless.
She says: “My heart sank when I was told my investment had gone - my dreams for a better future were shattered. I had taken out credit card loans on the strength of the dividend payments I was due to receive, which obviously I was unable to pay back, and I got even further into debt.”
With the help of Hugh James Carol has received £50,000 compensation through the Financial Services Compensation Scheme (the maximum available). She adds: “I want to make others aware of the dangers of transferring money out of a safe investment into a risky one. I would also say to others: if you are considering investing your pension elsewhere, make sure that you completely trust the financial advice you are being given, and insist that all of the risks are explained to you in full, otherwise don’t invest. If it sounds too good to be true, it probably is. I wouldn’t wish for anyone else to go through what I did.”
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.