The Pension Freedom Act comes into force on the 6 April 2015 and brings with it the ability for anyone over the age of 55 to gain access to their pension. However, it also creates a new wave of fraudsters eager to relieve unsuspecting people of their pensions.
The fraud occurs through various scams and follows a typical pattern where con artists promise they can offer very attractive interest rates on savings. All the investor has to do is withdraw their savings and place them in the investment account. Once they do so, they are promised generous returns and enough money to retire on. Unfortunately, the reality is that their money is not being invested and instead has been stolen, leaving them without a retirement fund or security as they approach their twilight years.
Scammers use a range of techniques to gain the trust of their victims. According to the Guardian, companies contact people via unsolicited phone calls or text messages, offering a “free review”. Others specifically target those on publicly available insolvency lists, while some approach people via official-looking ‘financial advisers’.
In the past these techniques have been used to persuade victims to sign up for elaborate schemes to gain access to their pensions. The scammer then disappears with the cash and the victim is left with a large tax bill and investigation by HMRC.
Those approaching the age of 55 are a primary target for the crime as, post 6 April, The Pension Freedom Act will allow them to access all their pension funds with withdrawals exceeding 25% of the total pension pot subject to taxation. Research from investment firm, Fidelity indicates that the threat is substantial and indicated around one in eight people aged 50 or over have been approached by fraudsters, promising to release more than the 25% tax-free lump sum, or to gain access to pension savings before than the minimum age of 55.
Over 10% of those approached by these so-called ‘pensions liberation firms’ trusted the advice given to them, said Fidelity which has partly been driven by a significant lack of understanding around the new pension rules as two thirds of the over-50s don’t understand them, according to the report.
This poses a huge problem for the government and pension regulators; as the legislation comes into effect, the government is forced to combat the fraudsters while also having to give adequate advice to those looking to release their pensions to ensure they have been treated fairly.
THE DEBT ADVISOR CASE STUDY
Beverley Budsworth, managing director of The Debt Advisor has recently reviewed one of the firm’s cases for a couple with an IVA and was horrified to find that they had lost almost all their pension savings.
In 2011, Mr B entered into a pension release scheme with Sustainable Wealth Investments (UK). At the time, he was told that he would not need to inform The Debt Advisor as their pensions were excluded from their IVA.
Mr B confirmed that he received circa £25,000.00 from his pensions through the scheme. Whilst Mr B had received a portion of his pension, the rest had been put towards investing in the company. However, it soon became clear that, through investments made by Sustainable Wealth Investments (UK), the remaining funds in Mr Bs pensions had disappeared and the Serious Fraud Office (SFO) launched an investigation into the parent company, Sustainable AgroEnergy,. In March 2012, the companies entered into administration and subsequently liquidation a year later.
Even more damaging was the fact that as Mr B was so impressed with the plan to liberate his pension and invest in eco / green schemes, that he told many of his friends, a number of whom have met a similar fate.
This only came to light when Mr B received a self-assessment tax bill for his pensions and as a result of funds released through the scheme. Mr B owed £16,052.04 including interest on tax on the withdrawn amount which Mr B will be paying for the next decade. HMRC had based its liability on the total amount of Mr B’s pensions, of which he only received a percentage. His friends that joined the scheme face similar misery.
HOW TO SPOT AND AVOID A PENSION SCAM
There are a variety of pension scams out there that take many seemingly-legal forms. The following are all common factors of pension scams:
- Cold calling, be it through a telephone call or a text message should be approached with caution. If you can’t identify the caller and they can’t prove their credentials don’t trust it
- Any adviser who appears keen to help you access your pension before you get to 55 years old
- Companies that offer a ‘loan’, ‘saving advance’ or ‘cashback’ from your pension
- Any reference to ‘loopholes’, overseas investments, creative or new investment techniques
- Being encouraged to speed up transfer of money to a new scheme.
The Serious Fraud Office (2014) has released a set of rules to avoid being hit by a pension scam.
Check the facts before an irreversible decision is made. A lifetime’s savings can be lost in a moment.
Key tips to avoid being scammed:
- Never give out financial personal information to a cold caller or be rushed into agreeing a pension transfer
- Find out the company’s background and whether advisers are regulated by the Financial Conduct Authority (FCA) at www.fca.org.uk/register
- Review promotional material for the scheme being offered and ask for a statement showing how your pension will be paid at retirement. Question who will look after your money until then?
- Seek independent advice before agreeing to any pension transfer
- Never be rushed into agreeing to a pension transfer
- Carefully consider investment opportunities that are overseas and may therefore fall outside the regulation of the Financial Conduct Authority (FCA)
- Refer to the pension scams booklet available at www.pension-scams.com.
If you think you have been a victim of this or another form of fraud, contact Action Fraud in the first instance on 0300 123 2040, or at Action Fraud.
WHAT IS ALLOWED?
- Nearly all Britons will be free to withdraw all of their pension savings in cash once they reach 55, regardless of employment.
- The first 25% of pension cash is tax-free. The rest will be taxed at the individual’s marginal rate – so many people could still be faced with a 40% charge. There will be no obligation to buy an annuity. Pensioners are free to draw down the money as they feel fit, but will want to withdraw at a rate that keeps them inside the 20% tax band.
- If the beneficiary is in a final-salary-style scheme that allows for a regular income at retirement, in most circumstances this remains a better option. However you will be free to switch it to a defined contribution ’DC’ scheme and then cash it in (subject to your marginal rate of tax).
- There are different rules for public sector workers. Anyone in an ‘unfunded’ scheme, such as nurses, doctors and firefighters, will not be able to access the cash. But if the scheme is ‘funded’ – such as local authority workers and the universities scheme – it can be transferred into a DC scheme and the money made accessible.
- If you have recently retired and bought an annuity or specialist drawdown scheme, you will not be permitted to amend it.
- Anyone under the age of 55 will still, in most circumstances, face hefty charges for withdrawing funds early from their pension pot. The age limit of 55 is set to be increased to 57 in 2028.
WHAT ISN’T ALLOWED?
- There are different rules for public sector workers. Anyone in an ‘unfunded’ scheme, such as nurses, doctors and firefighters, will not be able to access the cash. But if the scheme is ‘funded’ – such as local authority workers and the universities scheme – it can be transferred into a DC scheme and the money made accessible.
- If you have recently retired and bought an annuity or specialist drawdown scheme, you will not be permitted to amend it.
- Anyone under the age of 55 will still, in most circumstances, face hefty charges for withdrawing funds early from their pension pot. The age limit of 55 is set to be increased to 57 in 2028.
USEFUL LINKS
The Pension Regulator Advice Page
The Serious Fraud Office on Pension Scams
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