Martin Tilley

How to avoid being duped by investment scammers

How to avoid being duped by investment scammers
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For every hard-working individual who has built up a pension pot to fund their retirement, there is a criminal trying to scam their way into stealing some of it for themselves. Pension funds are often the second largest source of wealth behind home purchases and, as a result, are a tempting target.

Sadly, scams are not new to pensions. These are two of the most common forms.

Pension liberation

The victim is under the minimum age at which benefits can be drawn legitimately (age 55) and is promised access to their funds early, albeit subject to hefty charges.

Investment scam

The unsuspecting target is persuaded that current, legitimate, regulated pensions are underperforming and greater returns can be achieved by switching pension funds to a new vehicle. The new product invests in unregulated assets, promising great and sometimes guaranteed returns which instead pay inflated commissions/fees to the organisers and rarely, if ever, return the investment yield or the invested capital.

The starting point for both options is usually the offer of a free pension review. For liberation, the promise is usually the knowledge of a 'loophole' where pension funds can be invested into a company which will lend that investment back to the individual, effectively liberating it ahead of the minimum retirement age. No such loophole exists and the payment of funds either directly or indirectly back to a pension scheme member before age 55 (other than under terms of serious ill health) will always result in the Inland Revenue pursuing tax penalties of more than half of the pension fund.

For an investment scam, it is easy for a scammer to identify a period where the current pension may have underperformed, no matter how good it has been over the longer term. From there, exotic investments guaranteeing returns well above cash yields and inflation will be promised. These investments all have one thing in common - they are unregulated. This means that in the event the investment fails there is no recourse through an ombudsman or the Financial Services Compensation Scheme. Being unregulated, any supporting literature will not have been approved to be factually correct and can include convincing wording which will have no substance at all.

In some instances, the investment proposal is touted as being unavailable through pension funds. The victim is encouraged to draw out their pension funds and invest them personally. The draw is that the investment returns will soon recoup any tax payable on the pension funds taken out. Again, once outside of the pension, investments into unregulated products have no investor protection when they fail.

Is action being taken?

Fortunately, matters are in hand to prevent scammers getting in contact with victims, as well as prevention on creating new pension schemes necessary to receive the pension funds from legitimate funds. Bans on 'cold calling' and other means of cold communication are expected to be introduced later this year, and HMRC now examines new pension schemes carefully to see if they might fit the template of a scam. Unfortunately, scammers evolve new methods as quickly as the regulators close down the old ones, so you should be vigilant whenever you are questioned about your pension funds.

In the first instance, always seek the counsel of a regulated financial adviser. Secondly, always ask for details of any proposal to be put in writing with full supporting literature. This will enable you to check the details and verify their validity. Never be pressured into acting quickly. If an investment is for a limited time only, it should still be properly assessed.

Finally, remember that any investment or proposal that looks too good to be true invariably is.

Martin Tilley is director of technical services at Dentons Pension Management