Claire Trott: Starting the new year with a scam

Advisers have a key role to play in the fight against pension scams, writes Claire Trott. Here she outlines the major red flags to be aware of and outlines how to protect clients

The last year has been very difficult for some and the need to access funds from any source possible can put pressure on people to make poor decisions. Unfortunately, we know that scammers will work even harder to take advantage in times of pressure.

The Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) have long been backing a campaign to educate those at risk. Last year Censuswide indicated more than five million people across the UK could be at risk from these types of scams.

With a new year and hopefully a new outlook for later in 2021 we need to do all we can to protect our clients from these types of scams. The best way to do so is to understand the ways in which scams operate and educate our clients to spot the signs.

Exotic investment opportunities

Investing in something that seems exotic and mysterious may be tempting in these rather dull and boring times, but they are generally very high risk. These types of investments (such as overseas properties, renewable energy, forestry or biofuels) sound like they should be a safe investment.

However, even if they are legitimate, once the funds have left the UK, they could be very difficult to retrieve with regulation not being as strict elsewhere; in many countries, the money could be used for illicit purposes and never seen again.

It can be very difficult to check these types of investments, even for experienced investors and therefore adding to the overall risks involved.

Cold calling

Cold calling, as we know, is now actually 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 through cold calling is nothing new, nor is it isolated to pension funds, but pension funds are one of the largest investments that people will ever accrue, so naturally they are very appealing to scammers.

FCA identifies 30,000 instances of unregulated activity in last 12 months

The callers won’t necessarily be asking to access pensions and pass the funds to them directly; however, they may be trying to engage individuals further by visiting a website or agreeing to take pensions ‘advice’ from them. The cold call will likely just be the start or lead into another more elaborate scam.

Clients may well need to be reminded that any call out of the blue about their pension is not legitimate and shouldn’t be entertained for a moment.

Early access to pension assets

A pension fund is locked away until retirement for a good reason as we know pension providers aren’t making this up or being difficult.

For scammers to facilitate this scam they are going to need to try and take control of your client’s fund and then pay the money out, with a cut for themselves. They are then going to disappear, and your client will be left with the tax charge to pay HMRC for the privilege.

It is possible that following the amount taken by the scammers and any tax charges levied by HMRC, they may even end up owing money. This again is all about education.

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. Many 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 are probably going to 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, maximizing their total profits before disappearing. Again, these investments are going to be in areas where there is little or no regulation. So, we need to remind clients that what appears too good to be true should be treated as such and avoided.

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.

You know you won’t be putting your clients under pressure to make decisions, and so they should understand this. However, it is surprising how easily people can be swayed. 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.

What can be done?

The FCA and TPR are doing their best to educate people about how to avoid these scams. They want retirement funds protected in order to ensure savers can have a long and happy retirements spending their hard-earned money.

But who is better than advisers to ensure that clients are well educated enough to avoid being drawn in?

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