With great freedom comes great responsibility. With pensions freedoms comes the responsibility to protect your pension from scammers, (as well as the effects of inflation and potentially ending up in the wrong hands after your death). Here is a quick guide to what you need to know.
The danger of pensions scams
Up until 2015, there were, essentially, only two ways to monetise a pension fund. If you were in a defined benefits scheme, your former employer paid you a percentage of your salary. If you were in a defined contributions scheme, you had the option to take a small part of your pension pot as cash. The rest had to be used to buy an annuity.
This system had many disadvantages. In fact, with hindsight, it was almost inevitable that it was going to end up being updated to something along the lines of the current system. It did, however, have two significant advantages. Firstly, it was simple. Secondly, its simplicity gave it a lot of protection against overt scammers.
With that said, there is some nuance to this topic. As a reminder, annuities were literally for life. In other words, once you had used your pension pot to buy one, there was (usually) no going back. If you made the wrong choice, you were stuck with it. This meant that there was most definitely scope for mis-selling both active and unintentional.
It is, however, fair to say that the introduction of pensions freedoms has opened up a can of worms regarding pensions scams. On the one hand, the whole point of pensions freedoms was (and is), literally by definition, to give people more freedom in what they do with their pension pot. On the other hand, pension pots can become very large and hence are highly attractive targets for scammers.
If people are scammed out of their life savings, they may end up having to rely on the state pension and potentially other forms of support. This is disappointing for them and could end up being an unnecessary and undesirable drain on the public purse.
At present, there is little consumer protection
The Pension Schemes Act 2021 created a system of red and amber flags for pensions transfers. It gave pension trustees the authority to refuse transfers if they are identified as higher risk. There are, however, three significant limitations to these new powers.
Firstly, they only apply to transfers made under a statutory right, not discretionary transfers. Secondly, the legislation does not actually bar any transfers. Thirdly, the new rules could lead to a significant bottleneck on legitimate transfers. The reason for this is that providers might choose to refer cases to MoneyHelper by default rather than relying on their own due diligence.
This would make perfect sense for the provider. After all, they could hardly be taken to task by a regulator if they acted on government advice. The potential issue is that MoneyHelper may not have the resource to respond promptly to queries. If it doesn’t, significant numbers of people who want to make legitimate transfers could find themselves in limbo due to the need to make checks on potential scams.
The golden rule of protecting your pension
At the end of the day, there is one defining feature of all scams. In one way or another, they all prey on the victim’s lack of knowledge. The way to defeat all scams, therefore, is to know who and what you’re dealing with. In particular, never allow yourself to be blinded by science/jargon.
Any reputable provider should be happy to give you all their details/credentials and all the details/credentials of their product/service. If they’re not, or if you’re at all unclear about anything, then the safest course of action is to refuse. If you’re interested in principle, then get reputable, professional advice from an independent financial adviser.