Updated 25 July 2017
Gaining more control over your pension pot could come with a downside: certain unsavoury types may try to get their hands on it too. A side-effect of recent reforms is that the potential for pension-related rip-offs will rise. Don’t fall prey.
How do you plan to use the new pension freedoms? Do you still favour the tried-and-tested annuity, which offers a guaranteed income for life (although perhaps not a very big one)? Or are you tempted by the prospect of a large lump sum, to invest or spend as you see fit? Plenty of people are attracted by the second option – and some of them, sadly, are up to no good.
Recent research by the fund consolidator Phoenix Group has revealed a shocking rise in the number of people who are being approached by third parties, offering to help them access their pension pots. These approaches take the form of cold-calling, spam emails or text messages, and have tripled in number since the announcement of the pension reforms. To date, nearly half (45 per cent) of pension savers have been contacted, and 15 per cent of these have actually responded to the third party, while a further 11 per cent have considered it.
But hang on. If the whole point of the reforms is to give people more control over their funds, what are these cold-callers actually offering? The bait they use is ‘early access’ – the promise that you can withdraw some of your pension savings long before you reach 55. Such an arrangement would actually involve a loan from the provider of this ‘service’, in exchange for a fee and (high) interest from the pension pot once you turn 55.
Jam today! (and an empty jam jar tomorrow)
Given that a pension is meant to fund your retirement, any attempt to spend it sooner looks like the height of folly – and usually is. However, people in need of immediate funds may feel such measures are justified, and so take the bait. This is a terrible mistake. In nearly all circumstances, early access to pension funds is prohibited, incurring tax at 55 per cent plus charges that can take the penalty to 70 per cent. And this would be on top of the provider’s (i.e. fraudster’s) fee, which could be around 30 per cent or whatever they feel they can get away with. So, in return for a relatively small chunk of cash today, a person could be left with little or no remaining pension pot, and nothing to fund their retirement.
Parminder Dhothar, intelligence and investigations manager for Phoenix Group, said, ‘Anyone thinking of benefiting from the changes should do some thorough research and not simply respond to a text message or cold call.’ A good rule of thumb is: if they called you first, then they stand to benefit from this more than you do. So just hang up.
You might assume that only the naïve or desperate would fall for a scam like this. But the scammers can be very convincing, because with all the new legislation you may lose track of what is now legitimate and what isn’t. A worrying aspect of the research was the finding that only 29 per cent of people planned to consult an IFA about accessing their pension pot, while 46 per cent were content to ask only family and friends. If you’re basing decisions on outdated, incomplete or simply false information, you are a great deal more vulnerable to the well-informed con-artist.
Belt and braces still aren’t tight enough
On a related issue, the FCA is hurrying through new laws to protect people from rushing into bad decisions about their pension pots. Pension providers will have to ask individuals key questions about their circumstances, and inform them of the potential risks, before permitting access to any funds. This is intended as a ‘belt and braces’ approach to work together with Pension Wise, the government’s free guidance service – and also as an extra precaution for those who may choose not to use Pension Wise. The rules will be introduced provisionally from 6 April. However, if the consumer’s answers to the questions are satisfactory, then they will gain full access to their money – which may still not be in their best interests, if they have not taken proper financial advice.
Remember, the only advice you should trust is the kind given by a regulated adviser whom you have found and approached yourself. (You can do that here.) To find out whether your pension is sufficient for your needs, and how you could improve it, book a free pension check with an unbiased adviser.
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