Pensions Freedom Day: How to make sure scammers don’t steal your nest egg

Pensions Freedom Day on 6 April will signal open season for scammers intent on tricking the unsuspecting out of their pension pots. Kam Patel looks at how to stay safe.


Be on the lookout fortricksters

Pensions Freedom Day on 6 April will be welcomed by many people keen to take advantage of a new, flexible regime for managing their retirement nest eggs. But it will also signal open season for scammers intent on tricking the unsuspecting out of their pension pots.

Indeed it is certain that pensions tricksters are already plying their trade. A study by YouGov for Old Mutual Wealth published earlier this week shows that 15% of people aged 55 and over have been contacted about their pension in the last 12 months with an offer of a free review or some kind of financial access to their pension savings. More than half (56%) of these queries were via phone calls, 39% via e-mail and 35% via post.

The fieldwork for the YouGov study was carried out between 11 March and 17 March, with 1,023 adults contacted. According to the Office for National Statistics there are 18.5 million people aged 55 and over in the UK. Extrapolating YouGov's 15% survey finding implies that up to 2.8 million people aged might have received cold calls about their pensions in the last 12 months. It's difficult to say exactly how many of them will have been scammers, but it seems certain to have been a significant number.

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Adrian Walker, a pension analyst at Old Mutual Wealth, says the number of these unsolicited calls about pension "will undoubtedly increase when the pension freedoms kick in: people need to be on guard".

It's easy to see why scammers will be rubbing their hands with glee at the thought of 6 April. The new pension regime means people will no longer have to buy an annuity, or have a drawdown pension plan in place. Most mouth-watering for scammers is that from the age of 55 people can choose to take some or all of their pension fund in cash and spend or invest it whenever and wherever they wish.

It is vital for people to think carefully and seek impartial advice before taking any action. This is especially true if they are mulling taking their entire pension pot in cash. Those considering doing so should take a big step back and remember, firstly, that they could end up taking a huge tax hit by doing so.

Someone cashing in, for example, a £50,000 pension can have £12,500 tax-free, as 25% of a pension can be taken tax free under the new pensions regime. The sting in tail is that the £37,500 remaining in the pot would be taxed as income. With the higher rate tax starting at £42,385 from next month, it would only require a small additional income of £4,885 for the pot holder to dragged into 40% tax bracket. There are likely to be withdrawal charges to consider as well.

My colleague, MoneyWeek editor John Stepek, has written an excellent, free ten-page guide on the new pensions regime. In it, he explains clearly and concisely what the changes are, how you can enjoy your new-found freedoms and avoid potential pitfalls. And of course, how to deal with scam merchants. You can get your free copy of the guide here.

FCA sounds red alert over pensions scammers

The FCA wants would-be pensions investors in particular to:

Reject cold calls investment scammers will often cold call

Check the FCA Warning List for bogus investment offerings

Get impartial advice

Martin Wheatley, chief executive of the FCA, says: "The new pension flexibilities will offer people the freedom to make choices that suit their plans for retirement. But this is exactly the time when people need to alert to the dangers of scammers offering opportunities that are too good to be true.

"Our ScamSmart campaign sets out the straightforward steps people can take to protect themselves and number one is if you get cold called about an investment opportunity, hang up.

The FCA has set up a ScamSmart website that sets out in more detail what people should do to spot investment fraud.

Walker at Old Mutual says the FCA's ScamSmart campaign is a sensible initiative but the key is for people to get impartial advice before they take any action. He points out that free guidance is now available to anyone wanting it from government-backed PensionWise, adding there are also plenty of good authorised financial advisers out there who can save people from making costly wrong decisions about their pension savings.

Phoenix, the UK's largest specialist consolidator of closed life funds, has also been active in recent weeks warning about the threat posed by pension scammers. The life insurer says that over the years it has prevented 1074 people from losing a total of£22.3 million in potential pensions fraud and that it expects Pension Freedom Day to lead to many more cases.

Parminder Dhothar, intelligence and investigations manager for Phoenix Group, says: "The fact that there will be many policyholders confused about what the changes mean for them, when they come into force and the tax implications of cashing in a pension, increases the risk that they will be exploited by fraudsters."

According to an online survey of 2,000 people carried out for Phoenix by Opinium Research in early December 2014, pension savers are almost three times more likely to be approached or receive messages than they were before the budget announcement on pensions reform in March 2014. In addition, a staggering 45% of people with pension savings who have yet to retire have been contacted through unsolicited calls or messages sent via email or text.

Dhotar adds: "The increase in aggressive targeting by pension scammers since the March 2014 Budget is very concerning. Many unscrupulous businesses offer customers the opportunity to unlock their pension in exchange for cash, before they reach 55, and often without making them aware of the fees they are charging for this service. The fees can be as high as 30%. People are being deceived into making transfers into these schemes even though many in defined contribution schemes will be able to access cash directly from their pensions from April 2015".

Dhothar's top tips to help consumers protect themselves from potential fraudulent pensions activity are:

Don't allow yourself to be pressured into making a decision quickly

Think about the contact you have received

Do you need to pay up front?

If it sounds too good to be true, it probably is

Kam Patel

Kam is a former deputy editor at Hemscott Invest and online editor, City A.M and he was also previously the Digital Editor at IFA Magazine. Kam is currently a senior journalist at The Global Treasurer and contributes to MoneyWeek. Kam shares expertise on the FTSE 100, investing and global stocks.