Pension scams: don't be a victim
If you thought one of the good things about the government's decision to allow people to take their pension entirely in cash is that it will put a stop to 'pension liberation' fraud, then think again.
The new freedom, ushered in by the Taxation of Pensions Bill, will allow people aged 55 and over to access their defined contribution pension savings from this April - but many are still being targeted by fraudsters promising to help them get cash out
of their pension immediately.
Early encashment is not unlawful, but until the new rules come into effect, most people who cash in their pension plans will be liable to a huge 55% tax hit. More often than not, the fraudsters will also recommend an unauthorised investment for the residual pension pot, typically in assets such as timber, agriculture or hotel apartments (for which they will receive an introducer's fee of around 20-30%), which could turn out to be worthless or even non-existent.
In fact, the incidence of pension liberation scamming continues to grow, as publicity about the new freedoms has made the general population more aware that they can get cash out of their pensions - but often with only a sketchy understanding of what is permissible in this complicated area.
A spokesman for The Pensions Regulator said that while £495 million of fraudulent transfers can be accounted for, the actual level of funds moved into liberation schemes is substantially higher because not all activity is reported. The Regulator has used its powers to freeze assets in20 dodgy schemes, each of which will have several affiliate schemes, but this is still very much the tip of the iceberg.
Moreover, there is evidence that the perpetrators have stepped up their activity and broadened their search for victims. A few years ago, most frauds targeted people who were down on their luck, using for example lists of recent bankruptcies, but they are now targeting victims from across the social spectrum.
Claims firm Rebus has analysed the occupations of 114,000 victims of unregulated investment mis-management in the UK, and says - surprisingly perhaps - that over one third of those who fell for the dodgy investment sales spiel working in banking.
The professions are also well-represented. Around 10%, or 11,400, or the victims were dentists, 5% were legal professionals and a further 5% were doctors. In fact, The Pensions Advisory Service (TPAS) has warned that NHS workers are being specifically targeted by cold-callers who claim the NHS pension scheme is failing, and recommend supposedly safer investments.
The impact on people who have fallen prey to these scams can be devastating. The Regulator has collected information on some of the cases. For example, one 49-year-old Peterborough woman is facing a tax bill of nearly £20,000 and the possible loss of her home, after she responded to a website offering to give her a loan against her retirement savings.
After completing an online form, she transferred pension savings of over £70,000 in early 2011 and received nearly half of this sum back in the form of a cash advance. She paid fees of thousands of pounds to arrange the transaction and says she was assured that the cash was a loan that she would have to repay after 25 years, and that no tax would be owed.
In this case, the victim only became aware there were problems with the scheme after a firm of independent trustees was appointed by The Pensions Regulator. The new trustees are taking legal action against the former operators of the scheme to recover the assets, but the money is probably long gone.
Pension providers, and trustees in the case of final salary schemes, have become far more aware of scammers and are trying to block transfers where they do not believe the receiving scheme is bona fide. But one problem is that transfers can only be made into self-invested personal pension plans (Sipps), and these can look perfectly legitimate – the fraudsters will encourage the client to invest the money into a dodgy investment only after the transfer into the Sipp has been effected.
To tackle the problem, the government has set up a multi-agency taskforce, Project Bloom, which brings together various enforcement agencies. But the problem still falls between various stalls, as the Financial Conduct Authority is quick to bat the problem on to The Pensions Regulator. Ultimately it is likely this will be one of the problems that leads to a single pensions regulator.
Meanwhile, it is the ceding pension scheme that is in the frontline of fraud prevention, and perpetrators have quickly learned to second- guess their attempts to prevent a transfer. The ceding scheme can make life difficult by demanding lots of paperwork - but ultimately the fund belongs to the member. The scammers coach their victims on how to insist on their legal right to their pot, and even supply template legal letters, so forcing the scheme to allow the release of funds.
The extent of the problem can be seen in the numbers of scheme members applying for transfers. In contract-based money purchase pension schemes, for example, the Phoenix Group alone has blocked around 1,000 dodgy requests in the past year, and most insurance companies are citing at least 500.
Although people aged 55 plus must wait until 6 April to convert their entire pension into cash without punitive charges (at present they can take 25% of their fund tax-free), there are already some circumstances in which greater access is allowed.
Those who are at least 60 can cash out smaller pension pots in their entirety, if the total value of their pension rights under all registered pension schemes is £30,000 or less. Under these circumstances, the whole amount can be taken as a lump sum under special rules known as 'trivial commutation'.
Arranging this can be tedious, however, because HM Revenue & Customs rules state that all your pension pots in all schemes must be valued by your pension providers on the same day, no more than three months before the first payment, and all benefits must be paid within 12 months.
You can also take up to three personal or stakeholder pensions of less than £10,000 as cash payments, no matter how much you stand to receive from other pensions. For workplace pensions, you should check with your pension provider if this is possible.
While currently it is not possible to commute pension funds under triviality rules until age 60, this will reduce to 55 from April, in line with the rest of the legislation. But be aware that if you are really down on your luck, cashing in your pension plans could impact on your claims to state benefits.
You may also be able to cash out your entire pension without a tax penalty if you have an illness that has reduced your life expectancy to less than a year. If you're under 75 you won't have to pay tax on it unless your pension funds are worth more than the lifetime allowance. If you're over 75, then until April you will still pay 55% tax on such cash payments.
The new regime will allow you to dip into your pension whenever you like and take the first 25% of all withdrawals tax-free, with the remainder taxed as income. Drawdown and annuity options will still be available, but a third option will allow people to keep their pension where it is and simply take out chunks - known as uncrystallised lump sums - whenever they wish.
Will that stop the fraudsters? Probably not - indeed, it will just make the process of extracting the cash very much easier.
How the fraudsters operate
There are many adverts for pensions liberation on the internet, or you may be called out of the blue, but the perpetrators cannot simply be rounded up and shut down because their marketing activities do not in themselves break the law.
- Typically the scammer will first want to chat to you over the phone to ensure you have a sufficiently large pension fund to defraud, generally at least £15,000. These people can be very well-spoken and have learned techniques designed to make you trust them, such as quickly adopting your first name and finding common ground.
- If you have a poor credit rating, they are likely to make much of the fact that you do not have to go through a credit scoring process to be issued with a 'loan'. Borrowing money from your pension is not legal except in small self-administered schemes (SSASs) for businesses, so anyone promising this is promoting a scam.
- Never trust anyone who rushes you into any form of financial transaction.
- You will be 'made aware' of a brilliant new investment opportunity, promising annual returns as high as 20% and little or no risk. These are often offshore projects such as resort developments, land banking, plantations or carbon credits; sometimes the assets do not even exist. If you are ever tempted to purchase such an asset offshore, demand to be flown there to assess it for yourself.
This feature was written for our sister publication Money Observer
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.
The practice of locating your financial affairs (banking, savings, investments) in a country other than the one you’re a citizen of, usually a low-tax jurisdiction. The appeal of offshore is it offers the potential for tax efficiency, the convenience of easy international access and a safe haven for your money. However, offshore is governed by complex, ever-changing rules (such as 2005’s European Union Savings Directive) and, as such, is the exclusive province of the wealthy and high-net-worth individuals.
Defined contribution pension
Often referred to as a “money purchase” scheme, although offered by employers (who may pay a contribution) these pensions are more likely to be free-standing schemes that a person contributes to regardless of where they are employed. Here, the level of benefit is solely dependent on the accumulated value of the contributions and their performance as investments. Therefore, the scheme member is shouldering the risk of their pension, as the scheme will only pay a pension based on the contributions and investment performance. The final pension (minus an optional 25% that can be taken as tax-free cash) is then commonly used to purchase an annuity that would provide an income for life.
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.
Money purchase pension
A pension plan where the level of benefit paid out in retirement is solely dependent on the accumulated value of the contributions. It’s another term for a defined contribution pension.