Pension scam ‘red flags’ reach highest level on record – new ruling puts your pots at risk

Martin Lewis provides pension advice for the self-employed

Pension assets are a crucial element of a person’s financial life and as they’re built up throughout working years, they can be quite substantial sources of wealth. As such, pension funds are regularly targeted by fraudsters looking to take advantage of the nation’s elderly.

Pension transfer actions are regularly targeted for this and XPS Pension Group has a “Transfer Watch” system which monitors how market developments have affected transfer values for typical pension scheme members.

Additionally, it also monitors how many members are choosing to take a transfer from their DB pension scheme and through its Red Flag Index shows the incidence of scam red flags identified at the point of transfer.

On this, it was unfortunately detailed November saw a new high in the Red Flag Index, with 64 percent of transfers showing at least one warning sign of a potential scam.

Transfer activity overall remained steady and transfer values finished the month largely unchanged.

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Mark Barlow, a Partner at XPS Pensions Group, commented on the results: “November was a turbulent month with England’s second national lockdown and the US election and Brexit remaining in the headlines.

“As a result, it is no surprise that transfer values were volatile.

“It is concerning that we continue to see such high volumes of cases raising red flags of pension scams.

“The recent Lloyds Bank case will result in pension schemes making one-off payments to many former members, presenting a further opportunity for scammers.

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“It is vital that trustees and sponsors do all they can to protect their members, including signing up for the Pensions Regulator’s pledge to combat pension scams.”

The Lloyds Bank case being referred to is the court ruling on the GMP pension scheme, with the high court determining that pension schemes now need to revisit up to 30 years’ worth of past transfers and pay top-ups where necessary.

According to expert analysis, this ruling could completely upend the pensions market and even lead to financial pay-outs for those who were “contracted out” during their working years.

Ian Browne, a retirement planning expert at Quilter, explained what this meant in practice as the ruling was laid out in late November: “People that were working in the early to mid-90s for an employer with a defined benefit pension scheme that was contracted out of the second state pension may be eligible for compensation following today’s ruling.

“Ultimately, for some people, it will mean that they receive thousands of pounds as an additional payment, and employers that still hold a duty to fund an affected pension scheme will need to find the money to cover these costs.

“The devilishly complicated judgement relates to Guaranteed Minimum Pensions (GMP) and applies to pension schemes where members were opted out of contributing to the state earnings-related state pension (SERPS), normally known as ‘contracting-out’.

“A GMP effectively protected contracted-out pension scheme members, ensuring that they would receive at least as much from the private pension as they would have got from SERPS. It set the minimum pension which a pension scheme had to provide as a condition of contracting-out.

“The complexity arises because of pension equalisation.”

Ian concluded: “Following a 1990 court ruling, pension scheme benefits that differed for men and women had to be equalised. However, at the time the state pension age still remained different for men and women, and as a result, GMPs were not equalised, and became an anomaly in the pension system. A ruling in 2018 means that schemes should already be in the process of resolving the matter for members still in receipt of a GMP benefit, and today’s judgement means they will now need to re-evaluate payments made to members that transferred out.

“This is going to be a complete minefield as schemes will need to sort through the archives to find records up to three decades old. Having blown the dust off they will need to identify which scheme members would have benefited had GMP equalisation taken place when calculating their transfer value, and either reach out to those people to make them whole or ensure that they can at least do so in the event of a claim.

“There is no doubt that this process is going to take time and will leave a lot of pension schemes reeling. The hugely complex process will be both costly and time consuming for the schemes and their sponsoring employers. For the public it will undoubtedly leave pension scheme members, many of whom will now be retired and who may have long-forgotten the terms of their pension 20-30 years ago, scratching their heads at home wondering whether they might be due payment.”

Pension scam advice and guidance is issued by a number of impartial public bodies which includes the Pensions Regulator who details the following can be common scam warning signs:

  • phrases like ‘free pension review’, ‘pension liberation’, ‘loan’, ‘loophole’, ‘savings advance’, ‘one-off investment’, ‘cashback’
  • guarantees they can get better returns on pension savings
  • help to release cash from a pension before the age of 55, with no mention of the HMRC tax bill that can arise
  • high pressure sales tactics – time limited offers to get the best deal; using couriers to send documents, who wait until they’re signed
  • unusual high risk investments, which tend to be overseas, unregulated, with no consumer protections
  • complicated investment structures
  • long-term pension investments – which often mean people who transfer in do not realise something is wrong for several years

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