Pension flexibility has brought a great deal of choice and opportunity to investors. You can take your pension income to suit your circumstances and do not need to be bound by an arbitrary limit. If you want to spend it all on a holiday or a sports car, you can. Equally, you can decide not to take your pension at all, but preserve it for the next generation.
Investment technology has leapt forward in the past 20 years, with platforms offering access to thousands of options for your money. You can even invest your pension in your business premises if you wish, although this is a complex area that won’t suit everyone.
As with any step forward, there are negative consequences. Criminals have found ways to take advantage of this new flexibility, and investors are not always protected by a compensation scheme.
In this guide, we look at the main ways you can protect yourself and avoid losing your money to a pension scam.
Use a Regulated Adviser…
The first step is an obvious one. UK advisers are required to register with the Financial Conduct Authority (FCA). You can search the FCA Register to check that the firm you are thinking of using is fully authorised and regulated. Authorised and regulated advisers are unlikely to scam you.
To comply with the rules, advisers must hold a certain level of qualification. They have to undertake Continuing Professional Development, hold professional indemnity insurance, submit regular returns to the FCA and pay substantial costs to remain in business. While there are exceptions, most regulated advisers would not risk their career and reputation to recommend questionable pension strategies.
By using a regulated adviser, the recommendations are covered under the Financial Services Compensation Scheme. This means that if you receive bad advice, and the firm can’t compensate you, you will receive your money back (subject to certain limits).
A good adviser will not cold call you and ask if you would like to undertake a pension review. Never provide personal information over the phone unless you personally know the caller. Cold calling in relation to pensions was banned earlier this year, other than by FCA regulated companies, and only where the recipient has given their consent.
…And Regulated Investments
Unregulated funds and offshore pension companies may serve a purpose for some clients, but they are not suitable for the vast majority of people looking for pension advice.
The charges are often excessively high and may incur exit penalties if you change your mind. The funds are often not particularly transparent and may be higher risk than you think.
Additionally, you may not be fully covered under the Financial Services Compensation Scheme if you invest in certain products or outside the UK.
While it is not always straightforward to determine how a pension or investment company is regulated, your adviser should be able to help with this.
If It Looks Too Good to be True, It Probably Is
Perhaps you have been told that you can access your pension fund before age 55. Or that you can take the full fund as a tax free lump sum. Or that your money will grow at a guaranteed 10% per year with a 25% share in any profits.
Run. Scammers prey on investors by suggesting they can sidestep the normal pension rules or gain high returns without any risk. Trust us, this never ends well.
Don’t Invest in Anything You Don’t Understand
A share is a portion of a company’s value. By owning shares, you own part of the company and are entitled to some of the profits and growth in value.
A property investor buys buildings and earns rental income (and usually capital growth).
Fixed interest bonds are effectively loans to companies or governments, and generate interest.
Funds are usually made up of these three investment types, in varying combinations, usually with some cash added in. The value may go up or down.
Some funds are high risk, some are low risk, most are somewhere in between.
These are the basics of investing – while some of the concepts may be unfamiliar if you have never invested before, it shouldn’t be excessively complicated. Most mainstream investments can easily be Googled and found on Financial Express, Morningstar or the Financial Times website. If you can’t find details of the investment by Googling it, this should be a major warning sign.
Certain pension scams are built around fake investment companies. The company is registered (usually abroad) and invests in something niche and interesting. As Self Invested Personal Pensions can invest in pretty much anything, they can place a sizeable sum in these investment companies. Of course, the company invests in nothing, and the scammer is free to withdraw your cash from the company bank account.
There have been court rulings recently which place some responsibility on the pension companies allowing these investments. While this is a step in the right direction, it is unlikely to stop the scammers completely, as they will become more creative.
Be Wary of Transferring Out of a Final Salary Scheme
Transferring out of a final salary scheme can work well for some people, but should be a carefully considered decision taking your circumstances into account. You should never be pushed or pressurised into transferring your pension if you are unsure.
Final salary pensions are tempting for scammers, as the transfer values tend to be quite high relative to a typical pension pot.
It is now a requirement to receive financial advice if you want to transfer a final salary scheme with a value of £30,000 or more. The trustees will check that the adviser has the appropriate permissions and issue a warning leaflet about pension scams.
Transfer values of £30,000 are vulnerable to scams, as there is no requirement to seek any kind of financial advice.
Another tactic used by scammers is to refer investors to a regulated adviser to complete the transfer. The client is then encouraged to invest in the scam on an ‘execution only’ basis. This means they take full responsibility for the investment, and may not have any recourse to the compensation scheme.
Regulations are catching up, but criminals will always find a way to part investors with their money.
The best investments are undertaken as part of a financial plan, which take your circumstances and goals into account. Always do your due diligence, and if something feels wrong, it probably is.
