Scam-proof your pension
Savers are being targeted by sophisticated fraudsters who are desperate to get their hands on your retirement savings in a fresh wave of pension liberation scams.
Devastated victims can end up losing their entire pension and face additional tax charges and penalties, potentially leaving them penniless in old age and facing bankruptcy. Thousands of people have lost out to scams, from postal workers to doctors and airline pilots, making this the type of fraud that everyone must pay attention to.
There has been a huge rise in pension scams over the past few years, as criminals have clocked on to the vast wealth held by savers in retirement funds – around £2 trillion is held in occupational pension funds, according to the Office for National Statistics.
Fraudsters entice unsuspecting savers by bombarding them with texts and emails promising 'pension loans', 'pension selling' or the chance to 'cash in your pension'. Others are promised 'free pension reviews'.
Sometimes these scams target hard-pressed workers by offering access to their pension before the age of 55, while others encourage older victims to invest their entire retirement into a new fund promising incredible returns. What links the scams is that savers are required to transfer their pension savings out of their existing personal or occupational pension plan and into a scheme run by the pension liberation firm.
However, once the transfer is complete, the company is in control of the cash, creaming off vast commission for themselves and investing the rest in worthless property developments or even theatre productions. Others simply vanish with the funds.
Andrew Warwick-Thompson, executive director for defined contribution goverance and administration at the Pensions Regulator, says: "Pension scams remain prevalent and need to be stamped out. We have seen victims lose their entire pension savings by signing up to these offers."
The new pension rules, announced by George Osborne in his March Budget speech and which have now been introduced, have exacerbated the problem. There is general confusion among pension savers as they wait for this new pension regime to come into force, while fraudsters are using similar terminology as the government is using to legitimise their scams.
It is hard for regulators to know the scale of the problem but it has estimated that between £500 million and £1 billion has already has been transferred into pension scams by unsuspecting savers. JLT, the employee benefits firm, has estimated that the value of funds at risk could rise to £3 billion by 2018.
The early-access scam
One of the most well-known pension liberation scams promises savers access to their pension savings before the age of 55. The process often involves persuading savers to move their funds into a new scheme, then loaning back some of their funds. Victims may be desperate for cash to pay off debts or cover their basic living costs after losing their job.
Accessing your pension isn't illegal but savers do not realise they are subject to a tax charge of 50% if more than a quarter of their funds are withdrawn from their pension. There can be an additional tax on the pension of 15% if the individual is forced to pay charges applied to the scheme administrator. Meanwhile, unscrupulous firms also cream off commission of up to 30% from the amount transferred, leaving victims with little of their original savings.
Joanne (not her real name) fears she may lose her home after she fell victim to a pension 'loan' scam. The 49-year old, from Peterborough, was £20,000 in debt in 2010 but thought she had found the answer to her problems when she discovered a website offering people a tax-free loan against their retirement savings.
But now she is facing a tax bill of nearly £20,000 and is warning others not to fall victim to "nightmare" pension scams. After filling out an online form, she transferred pension savings of more than £70,000 in early 2011 and received nearly half of this sum back in the form of a 'loan'. She also had to pay fees of thousands of pounds to arrange the transaction.
Before transferring her pension savings, she had been concerned that if she released money before the age of 55, she may face a tax penalty but was reassured several times by those arranging the loan that tax would not be owed. However, last year she received a tax bill of nearly £20,000 for accessing her retirement savings earlier than tax rules allow. She fears she may have to sell her house in order to pay this bill.
She described herself as "very, very angry" at the people operating the loan scheme. She adds: "They were not transparent when I look back, and I think they should be accountable. They are not taking any responsibility whatsoever. It has been an absolute nightmare. I feel so angry. They said the money was in the form of a loan and because of that no tax was payable. They should put everyone back in the position they were in and pay the pensions they have lost and pay the tax bill."
The Pensions Regulator has the power to intervene in pension schemes that it believes could be scams, including the power to appoint new trustees to pension schemes, issue financial penalties and freeze money held in pensions. The regulator has made trustee appointments
to 35 schemes and has used its powers to apply to the courts to freeze assets in a further 20 cases.
Joanne first became aware that there were problems with the scheme she used after a firm of independent trustees was appointed by The Pensions Regulator, amid concerns that it was a scam. The new trustees are taking legal action against the former operators of the scheme to recover the assets, though Joanne does not know if she will get any of her money back.
Tom McPhail, head of pensions at Hargreaves Lansdown, the adviser, says: "This scheme is typical of the broad range of scams being perpetrated at present, however it is important to note that the details can vary from one scheme to the next. What links the schemes is that many of the losers have been relatively financially unsophisticated."
Clamping down on pension liberation scams has proved difficult because the process of transferring a pension between schemes is increasingly common. There are a number of legitimate reasons why a saver may wish to switch their pension savings to a new provider. Pension trustees also have a legal duty to carry out a pension transfer request within 90 days.
Until October 2013, it was surprisingly easy to register a pension scheme with HM Revenue & Customs. Critics have argued that the "tick-box exercise" allowed almost anyone to register an occupational scheme online in around 20 minutes. However, HMRC has now tightened up the procedure, fully investigating applications and applying a "fit and proper" test to administrators.
The clampdown has reduced the prevalence of early access scams. However, experts have warned that new types of scams have emerged involving transfers to self- invested personal pensions, known as Sipps, or small self- administered schemes, known as SSASs.
Margaret Snowdon, director of JLT Employee Benefits, explains: "Recent publicity to raise awareness of scams and the HMRC changes to the scheme registration have helped slow the rate of transfer to scams based on typical pension scheme vehicles but, more recently, the scammers have transferred their attention to SSASs, which are easier to set up. Of even greater concern is the rise in bogus investment opportunities. The adaptability of scammers means we should be no less worried about the social and personal impact of liberation activity."
Savers are persuaded to transfer their pension fund into a new Sipp or SASS and then invest their cash in an investment fund promising extraordinary rates of return. However, the investments usually turn out to bogus.
Phoenix, which manages closed pension funds with more than five million policyholders, says it has received a sharp rise in the number of suspicious transfer requests into Sipps or SSASs in recent months.
Steve Hyndman, head of financial crime prevention at insurer Phoenix Group, says "We are getting between 20 and 30 cases a month. The problem has got much bigger since the start of the year.
"The results of these kinds of frauds can be devastating because victims assume their savings are invested wisely. As a result, some may not discover the scam for years. When the member later wants to access their pension, they could find the scheme was set up entirely to commit fraud and it has been shut down, with the administrators and their pension pot nowhere to be found."
Over the past year, Phoenix has refused to transfer 381 suspicious cases, with a cumulative value of £8.3 million. Altogether it has identified and not transferred 997 suspicious cases with an average pot size of £20,000 and a cumulative value of just under £21 million.
But there are fears that many pension scheme trustees are not diligent enough to prevent dubious transfers out, or feel they are merely complying with current legislation by agreeing to them. There are also concerns that Sipp operators are not doing enough to ensure the investments held within wrappers are legitimate.
An industry code of good practice on pension liberation is due to be published at the end of the year, which will set out a clear set of principles that schemes should adopt with examples of good due diligence. This will help trustees and providers who want to protect their customers.
The Pensions Regulator has also recently introduced a new campaign encouraging trustees to carry out due diligence before allowing a pension transfer, checking that the scheme which their clients' funds are being transferred into is legitimate.
It has warned that any scheme promising to exploit loopholes, invest funds overseas or those that are newly registered should be treated as suspicious. In addition, trustees must check there is no evidence the money will be returned to the saver in the form of a loan or payment.
In September, regulator the Financial Conduct Authority called on Sipp operators to do more to protect their customers from scams, including undertaking due diligence on the investments that their customers hold in their Sipp accounts. It said that their duties were "enhanced" when investors held Unregulated Collective Investment Schemes (UCIS) in their Sipps.
However, experts are calling for more to be done to protect savers. Snowdon says: "The measures introduced by HMRC are a step in the right direction and will prevent scammers with previous form setting up new arrangements but it is too soft. I continue to call for professional scheme management. If all pension arrangements were managed by at least one registered professional, there would be lower risk of scams."
McPhail adds: "There is a role for pension schemes to play here in engaging and communicating with members to try to minimise the risk they'll take some ill-judged decision on what to do with their retirement savings.
"It is unfortunate that the government has been so preoccupied with other aspects of pensions governance that it has failed (until this year) to give due consideration to this problem."
What to do if you've been targeted by a pension scam
If you have been approached by an adviser out of the blue, check that it is approved by the Financial Conduct Authority (FCA). You can do this by visiting fca.org.uk. For help, call the FCA consumer helpline on 0300 500 8082.
Never be rushed into a decision and don't proceed unless you are absolutely certain your money will be safe because once you transfer, it's too late. If you want to use the money in your pension to repay debts, firstly contact a free debt adviser, such as StepChange Debt Charity, to find out what you can do.
Andrew Warwick-Thompson of the Pensions Regulator says: "If you are approached by someone claiming to be offering advice or that they can help you move a frozen pension, don't get suckered. You could be left with nothing for retirement, you will not be compensated, and you may have to pay fees and a high tax charge. The only people who benefit financially from the arrangements are the scammers themselves."
If you think you're being targeted by a pension scam, you should contact Action Fraud on 0300 123 2040.
You can also complain to the Information Commissioners Office if you continue to receive unsolicited texts from a pension firm. Complaints to the ICO about unsolicited pensions texts hit 739 a month in May 2013, although they have since fallen back to around 150 a month since then. Visit ico.org.uk or call 0303 123 1113.
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.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.