BLOG: Only financial education will stop pension scams
Pension fraud has rocketed in recent years, with 11 million people having received an unsolicited call or text about their pension, and criminals stealing millions of pounds of pension money in recent months. A Government consultation which closed last month is seeking views on new measures to control the growing threat of pension scams.
Financial scams are becoming increasingly advanced and hard to spot. At the same time, a recent overhaul of the ways we access our pensions has broadened the opportunity set for fraudsters. Freedom and choice rules introduced by George Osborne in April 2015 removed the compulsory requirement for savers to buy an annuity with their pension pots. The new rules offer the opportunity for savers to access their entire pension tax free from the age of 55, and choose to spend it, draw an income, or reinvest it as they wish.
Figures show that over-55s used these flexibilities to withdraw nearly £6bn from their pensions in the first year of them coming into force. While many have appreciated a more liberal set of rules around what they can do with their money, it also provides greater opportunity for scammers to encourage savers to move their savings to fraudulent pension schemes. This issue is only made more acute by the fact that a large number of people are looking for greater returns because low interest rates are depressing returns from traditional financial products such as cash savings and fixed termed bonds.
To counter these dangers, the Department for Work and Pensions (DWP) and HM Treasury are proposing to ban pension cold calling, increase powers to block transfers of pension money to fraudulent schemes and make it harder for these schemes to be established. The hope is that these combined measures will raise awareness of the dangers of pension fraud and cut off scammers’ main means of attack.
A Government crackdown is a good start, but the proposed measures largely paper over the cracks. Preventative actions such as these tackle some sources of scams, but criminals are both motivated and innovative, and their tactics evolve. More needs to be done to address the main reason that fraudsters are successful – victims falling for their ruses.
The Government has made efforts to address the need for greater financial education around retirement options by introducing a ‘Pensions Advice Allowance’, which will come into effect from April this year. This enables savers to withdraw £1,500 from their pensions to pay for regulated financial advice on their retirement strategy.
Unfortunately, many consumers are unaware of the benefits financial advice can provide, not just for protecting against pension scams, but to ensure they plan for an income which sustains their desired standard of living in retirement. Even worse, those savers most likely to make use of the Pensions Advice Allowance or access free information, such as the guidance offered by the Government’s Pension Wise service, are not the ones who fall victim to scams.
The real solution to pension fraud is an ongoing war of information which educates consumers on the fraudulent practices scammers employ, in particular on the use of technology. There is still a lot to be done to raise general standards of financial education in the UK, and campaigns should be versatile to keep at-risk groups up-to-date on the evolution of threats.
Financial advice is available to savers uncertain of what to do with their pension in retirement. This seldom involves an immediate pension transfer. Anyone who is contacted by someone they don’t know with the option of switching pension scheme should contact their employer or current pension company and remember: if it looks too good to be true, it usually is.
Katie Machin is a chartered financial planner at Walker Crips