New laws introduced by the Department for Work and Pensions (DWP) aiming to reduce the number of pension transfer scams have just come into force.
Losing your retirement savings to a fraudster can have a devastating financial and emotional impact on your later years.
Which? puts the new measures under the spotlight and offers some tips to help you protect yourself against fraud.
How the new system works
A new flag or traffic light system will block or slow down potentially dubious pension transfers. Pension scheme trustees and managers can now act decisively in response to certain warning signs.
Amber flags will be prompted by a proposed transfer into high-risk investments, hefty or unclear charges in the receiving scheme, moving money into an overseas pension or a flurry of transfers into a particular scheme or involving a single adviser.
This will result in a transfer being paused until the scheme member can prove they have taken scam-specific guidance from the Money and Pensions Service (MaPS).
Red flags mean that the statutory right to transfer is removed altogether. These are raised if financial advice is provided by unregulated firms or individuals, there has been unsolicited contact, incentives to transfer have been offered or the member was pressured to act quickly via a time-limited deal.
Why is the new system needed?
All recent figures suggest that the scale and scope of pension scams is on the rise. But official data is also only likely to be the tip of the iceberg, as many scams go unreported.
In July 2021, Action Fraud reported that pension scam victims were losing over £50,000 on average, more than double the typical figure reported in 2020 (£23,689).
Previously in April 2021, the Pension Scams Industry Group (PSIG) had estimated that around 40,000 savers had lost around £10bn to scams since 2015, based on an estimate of 5% of all pension transfers showing typical scam signs.
Becky O’Connor, Head of Pensions and Savings at Interactive Investor, said of the measures: ‘The new legislation has the potential to seriously reduce pension scams, as the statutory right to transfer was effectively enabling scammers. By making the ability to transfer more conditional and setting in place clear barriers, it will be very difficult for scammers to get people to transfer their cash.
‘It is important that freedom to choose the right authorised and regulated provider is maintained for people who want to move their pension for good reasons, like seeking better value or a wider range of investments.’
Which? recently investigated the impact of pension scams and spoke to Davina Frost who lost £50,000 of her retirement savings to fraud.
Who will be affected?
The new legislation will determine whether people have an automatic statutory right to transfer, depending on the type of scheme receiving the money.
Amber and red flags will apply as risk indicators, potentially blocking the relocation of funds, to all main defined benefit and defined contribution pensions, with the exception of public service pension, Master Trust and collective money purchase schemes which are considered as ‘safe destinations’.
More responsibility will fall onto trustees who will need to gather additional information from members wishing to transfer and exercise some judgement in triggering flags. For transfers to occupational pension schemes, the trustees will need to confirm the member has demonstrated an employment link with the receiving scheme.
The upside is that they will be able to block or suspend a suspicious looking pension transfer with much more ease and legitimacy than previously.
The DWP says that most transfers (around 95%), where trustees and scheme managers have no suspicions, can continue to proceed without any additional processes. The new regulations aim to provide effective tools for addressing the remaining 5%.
The DWP has said it will review the new regulations to judge their effectiveness within 18 months.
Listen to a recent episode of the Which? Money Podcast with experts discussing ways to stay safe from the rise in scams.
How can I protect myself from pension fraud?
The new measures will mean that trustees and scheme managers can step in to halt potentially dodgy transfers, but you still need to be on your guard.
There are some key warning signs to look out for, some of which are now official flags under the new system:
Offers of a free pension review – Be wary if you’re contacted out of the blue. Reputable advisers won’t do this, and it’s often the first step in trying to persuade you to make a poor ‘investment.
Time-limited offers – Don’t be pressured into making a hasty decision and research a firm before dealing with them. Check the FCA register of regulated companies (fca.org.uk/register), and the FCA warning list of known scam firms (fca.org.uk/scamsmart/ warning-list).
Offers to release cash from your pension before age 55 – Not only could you lose some or all of your pot to scammers, but early access incurs a hefty tax penalty from HMRC.
Investments promising guaranteed high returns – Don’t let the temptation to boost your pension steer you towards unusual investments which are unregulated and high risk.
If you are unsure about a major decision about your retirement savings, contact Pension Wise, the free government-backed pension guidance service available to over-50s, or consider speaking to a regulated financial adviser.
Three warning signs to know to avoid a pension scam
Watch the video below to find out more about how to spot a pension scam.