The government has announced new laws to help prevent pension savers from transferring their retirement savings to fraudsters.
Fraudsters often take advantage of those who are approaching retirement by convincing them to transfer their savings to fake pension schemes. These scams schemes might promise lucrative returns, which never materialise, or offer a free pension review, or early access to pension cash.
Scammers can get away with this because current pension rules enable retirement savers to transfer their pension pot to a different scheme if they want to.
Under the new regulations set by the Department of Work and Pensions (DWP), if there are signs that a scheme might be a scam, trustees and managers will be able to intervene and delay or stop the transfer until the new scheme has proved its credentials.
Becky O’Connor, head of pensions and savings at Interactive Investor said: “The proposals could help to prevent pension transfer scams because they remove the automatic right to transfer a pension – something fraudsters have been exploiting.
“The new system might slow down some pension transfer, although this should not be a significant risk once the regulations have bedded in. It is important that freedom to choose the right authorised and regulated provider is maintained for people who want to move their pension.
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How do the new rules work?
If a pension saver wants to transfer to a new scheme, and their pension provider is concerned that they might be transferring to a scam scheme, the provider can either raise an ‘amber flag’, which enforces a review process with the government’s Money and Pensions Service, or a ‘red flag’ which can stop the transfer from going ahead.
If an amber flag is raised, the transfer will be paused until the person wanting to make the transfer has received scam specific guidance and can make an informed decision as to whether to proceed.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown said: “Scammers rob people of their hard-earned retirement savings and for too long schemes have been powerless to stop them. These measures are a welcome step forward in protecting scheme members by giving schemes the power to stop transfers or refer members for guidance if they have any suspicions.”
The government said it will review the new regulations within 18 months to ensure they remain as effective as possible in targeting the evolving methods used by scammers.
How can I protect myself from pension scams?
If anyone provides you with a pension opportunity that sounds too good to be true, remember it usually will be.
Pension scams frequently involve companies telling you that you are free to access your pension early, and offer you a ‘loan’, ‘savings advance’ or ‘cashback’ from your pension,If you are victim of this type of scheme, you’ll not only have to pay a hefty tax charge to the Government, at least 55% but sometimes as much as 70% of your pension pot, but you’ll also have fees taken from your pension for the transfer, which can be 20% or more of your pension savings.
If you are considering transferring your pension, make sure you do plenty of research first so that you can be certain the provider you’re planning to switch to is legitimate.
Jon Greer, head of retirement policy at Quilter, said: “Ultimately, the best course of action to ensure you don’t fall foul of pension scammers is to make sure the person or firm you are dealing with is regulated by the FCA; check any offer against the FCA’s Scam Smart website; speak to Money Helper or take regulated financial advice. Given a pension is often the largest asset people have other than their home, it is well worth proceeding with care and speaking to a qualified expert before taking any actions.”
You can find out more about pension scams and how to avoid them in our guide Don’t let scammers steal your retirement.
If you are thinking about transferring your pension, as well as being on your guard against scams, you should also be certain that you aren’t giving up any valuable benefits. For example, if you have a final salary or defined benefit pension, transferring to a defined contribution pension is rarely the right decision. Few things in life are guaranteed, with the rare exception of a final salary pension. So the main risk is that by transferring out of the scheme, you are giving up a guaranteed annual income for life. You can read more about this in our guide Should I transfer my final salary pension?