Annuity reforms "train crash waiting to happen" if action not taken on scammers
The government risks causing a spike in pension fraud cases if it does not put protections in place for savers who plan to trade in their existing annuity policies, online broker AJ Bell has warned.
From April of next year, new reforms will allow people to cash in annuities via a secondary market. Annuities provide retirees with a guaranteed income for life and the reforms provide an exit route for savers who are locked into annuity products that provide poor returns.
If an annuity policy is above a certain size, the policyholder will be required to seek financial advice. While this is a positive, alongside the risk warnings that providers will issue, AJ Bell believes there is still a significant danger that people may be targeted by fraudsters.
For example, over the six months that followed the introduction of the pension freedoms in April of last year, the amount of money that was reported stolen through pension scams almost doubled in London, from £5.4 million over the same period in 2014 to £10.6 million in 2015, according to the City of London Police.
It is important to note that this represents a small proportion of the incidence of fraud nationwide.
With HMRC estimating that around 300,000 people will cash in their annuities during the first year of the reforms, AJ Bell warns that these people will become obvious targets for scammers.
"The government needs to stop dithering and take meaningful action on pension scams before the secondary annuity reforms are introduced. This is a train crash waiting to happen - policymakers must not sit idly by and watch it unfold," explains AJ Bell senior analyst Tom Selby.
"Pension scammers ruin peoples' lives, and it is incumbent on everyone connected to the pensions industry - including politicians, regulators and providers - to do all in their power to defeat them. Banning cold-calling for pensions would not solve the problem of pension fraud altogether, but it would provide a real deterrent to scammers by cutting off one of their primary methods of contacting retirees."
AJ Bell highlights a petition that was initiated by Red Circle Financial Planning director Darren Cooke to ban pensions cold-calling. It has already attracted over 1,000 signatures and backing from former pensions minister Ros Altmann.
The petition can be signed here.
This article was originally written for our sister publication, Money Observer.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.