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Pension scams were on the rise in the UK throughout 2023 and, sadly, look set to continue into the new year, with criminals looking to take advantage of people's retirement savings.

Pension Freedoms legislation introduced in 2015 increased the amount savers could access from their pension pot from 25% to 100%. The downside to this, however, is that those who are victims of pension fraud could potentially lose their entire savings.


If anyone ever asks you to withdraw your entire pension in one go - STOP and think very carefully. 

Why?

You pay income tax on withdrawals from your pension over the 25% tax-free cash entitlement. As an example, if you withdraw £300k as a lump sum after your entitlement, you will be taxed as if you’ve earned £300k income in that year and you’ll pay the 45% additional rate income tax for the majority of your withdrawal.

A good pension adviser would almost never recommend doing this, even if it is legitimate advice and not a scam - it’s just not practical and is a huge tax and retirement planning risk.

Pension scams come in many forms, from promising extravagant returns on overseas investments to promoting early access to pension money. Often, the money is transferred into unregulated investments or simply stolen outright. Victims are left with empty pension pots and shattered retirement plans.

It's critical that everyone with a pension educates themselves on how to identify red flags.

The good news is that with some research and healthy scepticism, most pension scams can be detected and avoided.

Here are the essential things to look out for.

Common Pension Scam Red Flags

Pension scammers use a variety of tactics to try and part investors from their retirement savings.

Promises of Unusually High Returns

If it sounds too good to be true, it probably is. Claims of massive, guaranteed returns above market norms are a telltale sign of a scam.

Pressure to Decide Quickly

Scammers may try to rush you into making a decision about your pension before you have time to thoroughly research the opportunity. Take your time and don't be pressured.

Complex Investment Structures

If the investment opportunity feels more complicated than it should be, stop and think. Many of us lack confidence when it comes to financial matters; scammers take advantage of this by creating complicated scenarios involving multiple parties, jurisdictions, or structures. If it feels overly complex and convoluted this should raise suspicions. Legitimate options are typically more straightforward.

Overseas Investments

Many scams promote exotic overseas opportunities to lure in unsuspecting investors. While some international investments are legitimate, many turn out to be elaborate frauds designed to steal your pension. You should always do thorough research when considering any investment opportunity.

Avoiding Questions

If the company managing your pension investment(s) are slow to respond to your queries, are vague when replying to your questions, or avoid answering you altogether, this is a major red flag. Yes, legitimate companies are often busy, but they should respond to your queries and provide information in a timely manner.
Trust your instincts. If an investment sounds fraudulent, it likely is. If you’re still feeling unsure, you can follow the steps below.

Check Who You're Dealing With

It's critical to check the credentials and reputation of any person or company you deal with. Scammers often pretend to be legitimate investment advisors or pension managers, but the good news is there are ways to check who you’re dealing with.

Double check credentials by looking on the Financial Conduct Authority register, or FCA Register. Search the company name online, make sure they’re registered, and look for any warnings or complaints associated with their name.

Check for proper certification and registration. Genuine pension advisors will have designations like Chartered Financial Planner (CPF), for example.

Taking the time to thoroughly vet advisors and pension managers can help you avoid transferring your savings into the hands of scammers. Don't trust anyone with your retirement money until you're absolutely certain they are who they say they are.

Don't Be Rushed or Pressured

A common tactic used by pension scammers is to pressure you into making quick decisions about your retirement savings. They may use high-pressure sales tactics, time-limited offers, or claim the opportunity is urgent in order to get you to act before you have time to think, or talk things through with friends or family.

It's important to ignore this pressure. Take your time, and research all your options thoroughly before making any decisions concerning your hard-earned pension money. Good investment opportunities will still be there tomorrow.

Don't let anyone rush you into signing documents or transferring funds without vetting the opportunity completely. Ask for detailed information in writing and take time to review it. If you’re ever unsure, consult a financial advisor or the Money and Pensions Service.

Understand What You're Investing In

It's essential to have a clear understanding of exactly where your pension money is being invested before transferring any funds. Do not invest in anything you don't fully understand. Don’t be afraid to ask questions of your advisor or consult another professional.

It’s also important to be wary of any investments that seem overly complex or opaque. Things like overseas resort developments, forestry projects, storage units, or crypto ventures can be fraught with risk. This is because they’re naturally complex and less regulated than traditional investments you’d expect to find in a pension. 

Similarly, investments involving multiple layers of companies should raise red flags. There is rarely a good reason for excessive complexity with legitimate investments - especially in a pension.

You always have the right to request detailed documentation that explains the investment opportunity in clear terms. Review this carefully and ask questions if anything is unclear.

When it comes to your pension, if asked you should be able to explain exactly how the investment will work, how returns are generated, and where your money will be held.

Watch Out For Unusual Investments

Pension scammers frequently entice people with exotic, unfamiliar investment opportunities, often focused overseas or in complex assets. Some examples include:

  • Cryptocurrencies - Digital currencies are highly speculative and volatile, and involve major risks. You should seek independent advice if considering this type of investment.
  • Overseas Property
  • Renewable Energy Bonds - Scammers sometimes promote promising green energy projects, but the underlying businesses could be shaky or even fake. Investing your entire pension pot into a single company is far too risky than any financial adviser would ever recommend - especially one that isn’t listed on a major stock exchange.
  • Forestry Schemes - Investing in overseas timber ventures or sustainable forestry can be fraught with risks and scams.
  • Storage Pods - Warehouses full of storage pods are pitched as a solid investment but can lack transparency.
  • Wine / Whisky - Casks of alcohol are marketed as limited commodities but the true value is unclear.

These types of alternative, complex assets require extensive due diligence. Independent valuation of the underlying assets, financial statements, and ownership rights are essential. Most experts recommend avoiding such unusual investments within pensions altogether.

If something sounds too good to be true, exotic, or simply opaque, steer clear. You might feel happier sticking to tried and familiar stocks, funds, and bonds within your pension.

Be Wary Of Extraordinary Returns

When assessing pension investment opportunities, any promises of extraordinarily high returns should raise immediate suspicion. Returns that sound too good to be true usually are.

Scammers commonly tout double-digit returns to tempt investors, claiming their schemes offer better profits than mainstream investments. Things like 20% annual returns, guaranteed income streams, or quick doubling of your money are typical ploys.

However, legitimate pension investments offer far more modest and realistic returns. Quality stocks, bonds, and funds aim for long-term, sustainable growth - not get-rich-quick overnight profits.

Do your research to understand reasonable benchmarks for returns based on factors like asset classes, risk levels and time horizons, and view claims of massive returns with scepticism.

Maintain realistic expectations, particularly when investing for major life goals like retirement. If something sounds too good to be true, it almost certainly is.

Seek Impartial Financial Advice

If you are considering making major changes to your pension or investing in unfamiliar opportunities, it’s wise to seek impartial financial advice first before transferring any pension money.

Look for an independent financial advisor (IFA) who specialises in pensions, such as SIPP Advice, and is not affiliated with any investment company or pension provider. Their guidance will be objective, rather than biased towards selling you certain products.

A good advisor can help you thoroughly vet potential investments, assess risks, identify red flags, and determine if opportunities align with your goals. They can also explain complex concepts clearly so you fully understand where your money is going.

Seeking expert insights can provide an additional layer of protection for your savings.

Be prepared to pay for sound financial advice – it could be money well spent. You've worked hard to save for retirement, so take steps to ensure your nest egg is protected.

Report Suspected Scams

Finally, if you believe you have been targeted by a pension scam or spot red flags about an investment or advisor, immediately report your concerns. This helps protect others from becoming a victim.

Contact Action Fraud to report fraudulent activity online or by phone.

File complaints about misleading financial promotions with the Financial Conduct Authority.

You can also report concerns to The Pensions Regulator and the Money and Pensions Service for guidance.

Provide key details like company names, dates, individuals involved, paperwork, phone numbers, email addresses and assets at risk.

Reporting scams promptly prevents criminals from covering their tracks, and your information joins other reports to help authorities build cases against pension fraudsters and shut down schemes.

This article has been written and provided by Sam Hodgson at SIPP advice

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