Beware of fraudsters after pension pots

Over-55s are falling into traps that can cost them dearly, writes Jeff Salway

The pension reforms have made it easier to access pension savings, but have also encouraged fraudsters to target the over-55s. Picture: Hongqi Zhang
The pension reforms have made it easier to access pension savings, but have also encouraged fraudsters to target the over-55s. Picture: Hongqi Zhang

Income-hungry savers in Scotland are raiding their pension pots for cash to invest in high-return investment plans – and they’re walking straight into the traps laid by fraudsters.

Over 55s are increasingly at the mercy of investment scams as unscrupulous firms target investors with unregulated and high-risk products in the wake of the so-called pension freedoms, the Financial Conduct Authority (FCA) has warned.

Sign up to our daily newsletter

It said that a growing number of people aged 55 or over are being conned out of their lifetime savings by firms touting unregulated products investing in assets such as wine, art and land. Those with savings of £10,000 or more are three-and-a-half times as likely to fall victim to investment fraud, according to the regulator.

Mark Steward, director of enforcement at the FCA, said: “You don’t need to be gullible to lose money to a scam or fraud. Fraudsters target financially sophisticated people too, who often don’t like to ask what might sound like silly or basic questions.”

Almost half of investors in Scotland aged 55 or over have been contacted at least twice over the past year by an investment firm they had never heard of, the FCA found.

And those fraudsters are enjoying plenty of success, due to a potent combination of factors. The first is the pension reforms that took effect in April 2015 and which have made it far easier for savers to access their pension pots from the age of 55.

The second is the low interest rate environment that has driven the returns on cash accounts to rock bottom and forced savers to take extra risk in search for more income.

Nearly four-in-10 investors in Scotland said they had moved money out of cash products into investments over the last five years in a bid to boost the returns on their savings.

A fifth admitted they had begun to consider unfamiliar investments that appear to offer particularly high returns, despite the risks involved.

Gareth Shaw, head of consumer affairs at Saga Investment Services, said: “Losing a few thousand pounds in a scam is bad enough, but now that consumers have the ability to pull all of their pension savings out in one go and thereby have access to potentially hundreds of thousands of pounds to invest, the risk posed to their financial well-being could be potentially catastrophic.”

Investment scams have always been a problem, said Graeme Mitchell, managing director of Lowland Financial Planning in Galashiels. The worry is that the current conditions are ripe for them.

“Investments are driven by two things: fear and greed,” said Mitchell. “Fear of losing money stops people investing in things which have the potential for the better returns if held long enough – but greed is always likely to tempt people into something with the promise of great returns, and logical thinking goes out the window.”

The damage is exacerbated by low investor awareness of the extent to which they are protected in the event of something going wrong.

The FCA found that investors in Scotland are the least likely in the UK to know they probably do not have recourse to either the Financial Services Compensation Scheme or the Financial Ombudsman Service (FOS) if they lose money in unregulated investments.

“I would like to see a logo to indicate a regulated product, so that people know there is investor protection and can therefore be more confident about using it,” said Mitchell.

“You will never stop scams and they are becoming ever more sophisticated, but a logo or kite mark for regulated schemes would help considerably.”

The FCA’s findings came as the FOS reported that complaints about personal pensions jumped by almost a quarter in year to April. The increase was due primarily to the pension freedoms, it said, but there was also a rise in complaints about so-called pension “unlocking” (where firms promise access to pensions cash before age 55).

“Typically, people had received a call or text from a company about a “legal loophole” – which, on the face of it, offered them the chance to access their retirement pot early.

“But these companies often hadn’t given the full picture – particularly around the tax implications,” said a spokesperson for the FOS.

“Some people who contacted us had lost everything in their pension after signing up to “liberate” or “unlock” it. From experience, we know that the sooner people report what’s happened, the better the chances of recovering the money.”