PensionsAug 29 2019

Scam smart: Six ways scammers are targeting vulnerable individuals

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Scam smart: Six ways scammers are targeting vulnerable individuals

Just when we think we are getting wise to one type of pension scam, another pops up. This summer the Financial Conduct Authority and the Pensions Regulator are again warning the public to be careful by highlighting how easy it is for scammers to convince them to part with their money. 

The FCA and TPR quote research figures by Censuswide that indicate more than 5m people across the UK could be at risk from these types of scams. Below is an analysis of the most popular types of scam currently in use.

Exotic investment opportunities

Investing in something that seems exotic and mysterious may well add some excitement to the not-so-exciting world of pensions, but these ‘opportunities’ are generally very high risk. 

Investments such as overseas properties, renewable energy, forestry or biofuels can sound safe enough to the non-professional. But even if they are currently a legitimate investment, funds could be very difficult to get back once they have left the country.

Regulation in other jurisdictions may not be as strict as in this country, for example. Hence the funds handed over may well be used for illicit purposes rather than the purpose the client had been led to believe. Even pension professionals may find it difficult to ascertain if these investments are legitimate, so being approached directly just adds to the overall risk and should be met with increased caution. According to the research quoted by the FCA and TPR, 23 per cent of 45 to 65-year-old pension savers would pursue an offer of high returns in one of these types of exotic investments.

Calls out of the blue

Calls out of the blue, or cold calling as it is known, are now banned for pensions, but the legislation is only enforceable for those calling from the UK or offering UK services. For calls originating outside the UK, the regulator is somewhat toothless in preventing or prosecuting these scammers. 

Targeting individuals through cold calling is nothing new, nor is it isolated to pension funds, but as the latter are one of the largest investments that people will ever accrue, they are naturally very appealing to the scammers.

The callers won’t necessarily be asking clients to access their pensions and pass the funds to them directly, but may be trying to encourage further engagement by visiting a website or agreeing to take some pensions ‘advice’ from them. The cold call is likely to be just the start and lead to another of the scams discussed here.

The main thing to remember is that the callers shouldn’t be calling in the first place. The cold-calling ban came into effect on January 9 2019; any unsolicited calls about pensions are now illegal. Breaking the law is never a good start to any financial relationship.

The research cited by the regulators states that 23 per cent of 45 to 65-year-old pension savers would engage with a cold call from a company asking to discuss their pension plans. If a company does call, they should be reminded that they are breaking the law and can face fines of up to £50,000.

Early access to pension assets

A pension fund is locked away until retirement for a good reason. There are strict laws about the age at which these tax-privileged savings can be accessed, how they can be paid, and how they will be taxed. 

For all but a small minority of people, the earliest they can legally access their pension is age 55. Funds taken out before then would be subject to very high tax charges – up to 70 per cent of the amount taken – so it isn’t going to be worth doing.

The scammer will try to take control of a fund and then pay the money out, with a cut for themselves. They are then going to disappear, leaving the client with the tax charge to pay HM Revenue & Customs for the privilege. It is possible that a client will have nothing left once the scammers have taken their gains and HMRC has levied its charges – they may even owe HMRC money from their own pocket.

A slightly smaller proportion of those surveyed in the research felt they could fall for this type of scam, with only 17 per cent of 45 to 54-year-old pension savers saying they would be interested in a company that offered them early access to their pension pot.

Guaranteed high returns

Offering guaranteed high returns has been a staple of scammers across the years and it isn’t just related to pension funds. Numerous investments have promised to pay high returns for many years with a full return of capital. 

In order to entice people, it’s likely that these early investors could well see returns equivalent to what they are expecting, although it may not be derived from the investment they think. The funds of later investors may well be used to pay the returns to the original investors, and possibly even be used to return their capital.

By doing this the scammers can draw in more and more investors, maximising their total profits before disappearing. Again, these investments are going to be in areas where there is little or no regulation. What appears too good to be true should be treated as such and avoided.

Fortunately, the promise of unrealistic investment returns caused alarm bells with a significant proportion of those surveyed. Only 13 per cent of 45 to 65-year-old pension savers would pursue an offer guaranteeing returns of 11 per cent on their pension savings.

Free pension reviews

The offer of some ‘free advice’ can be very tempting. But it can also mean that scammers get their hands on a lot of personal data and precise details of a client’s pension schemes. They may be offering the free review simply to encourage a transfer to another pension, where one of the other scams can take place, or they could be accessing information to try and take the funds without the client knowing.

That said, just because someone is offering a free pension review doesn’t make them a scammer. Many regulated financial advisers will meet and discuss all areas of financial advice without an initial charge. What sets them apart from the scammers is, of course, the fact that they are regulated. 

According to the research, just 10 per cent of 45 to 65-year-old pension savers would say yes to a free pension review from a company they’d never dealt with before.

Time-limited offers 

Last but not least is the pressure sales technique of a time-limited offer. Pensions are a long-term investment and although in the financial markets there are deadlines for certain investments, consumers should never be put under pressure to sign anything without having the time to consider it properly in the first place. 

In many cases, the pressure will put people off, but when combined with the promise of great returns that could be missed, or exotic and exciting investments, it can be easy to get carried away and persuaded by these clever scammers.

Once again, consumers do state they are conscious of this kind of risk – in theory, at least. Just seven per cent of 45 to 65-year-old pension savers would say yes to a company that offered a special deal that wouldn’t be around for long and provided a courier to sign the paperwork immediately.

What can be done?

One of the most important ways to combat scammers is to be vigilant. Regulated advisers do their bit, and the FCA and TPR are doing their best to educate people about how to avoid these scams. 

Understandably, they want retirement funds protected so savers can all have long and happy retirements spending their hard-earned money.

Claire Trott is head of pensions strategy at St James’s Place Group