Early last summer Money Observer alerted its readers to the threat of unscrupulous advisers encouraging investors to switch their established pension scheme funds into unregulated, high-risk investments such as overseas property, agriculture, forestry and carbon credits, using a self -invested personal pension (Sipp).
Sometimes these advisers pretend that a way has been found to access your pension pot before the age of 55, the minimum age people in most jobs are allowed by law to withdraw from their pension. Thousands of people have been sucked in – some wanting to release their pension savings because of financial hardship and some, lured by the promise of exaggerated investment returns.
The regulators are now somewhat belatedly investigating this type of practice. One problem has been that different elements of these arrangements fall under different regulators, so the Pensions Regulator has worked with other agencies to produce warnings about early encashment, carrying scorpion imagery, which for example will be inserted into the packs pension providers send members who request a transfer. HM Revenue & Customs has also set up a counter fraud and avoidance team to clamp down on pension unlocking schemes, and the FSA is undertaking a consultation on whether unregulated investments should be allowed into Sipps at all, meanwhile altering the licenses of some advisers, to prevent them continuing to operate in this way.
The problem with these scams is they can sound convincing, so it has been not only fools parted with their money. They work like this: potential clients are lured by small ads, cold-callers or alternative investment websites promising better returns on their pension pots, and sometimes access to cash from their pension savings.
An ‘introducer’ (for which read: a completely unregulated person) will connect the investor to a bone fide financial adviser who is required to manage the paperwork involved in switching from the old pension scheme into a Sipp. The adviser will normally claim to be giving advice only on the Sipp wrapper that will hold the transferred funds. Once the transfer has been processed the introducer steps back into the frame and encourages the investor to buy into the high-risk investment.
He will receive an ‘introducer’s fee’ from the investment firm, which can be as much as 20-30 per cent of the transfer value – your lifetime savings. And it’s all perfectly legal.
Sipps are currently allowed to hold a very wide variety of investments, but assets such as agricultural land, diamond mines, timber and overseas property fall entirely outside the scope of FSA regulation. This means, for example, that an introducer can make very exaggerated promises about potential returns.
Many introducers work by phone from southern Spain and are very practised in their deception. They have a well rehearsed patter, such as quickly calling you by your first name and trying to find some common ground to build up trust. We have been very heartened to hear that some of those introducers we named last year have since been forced to run to ground.
Even worse in a way, not everyone trying to sell you a high-risk investment knows it won’t come good – some introducers are simply optimistic young people with no financial experience who have fallen for the investment firm’s hype themselves and, after a marketing presentation or two have been let loose with a phone and cold-calling script. They can sound convincing because they communicate genuine enthusiasm.
I know, because having posed as a secret shopper, my name now appears on some kind of Gullible Fool List passed between dodgy firms, and my phone does not stop ringing with nuisance calls.
Take, for example, Sustainable Growth Group, a bio-fuel operation involving Jatropha tree plantations in south east Asia, now under investigation by the Serious Fraud Squad. Investors have lost £32 million and law firm Regulatory Legal, which has reviewed over 600 of its case files, found that every case was linked to the transfer of other pensions to Sipps. In 97 per cent of cases the investor had never met the adviser who helped with the transfer. The scheme was generally described as low/medium risk, and there was evidence of pension liberation before age 55, transfers from final salary schemes, illustrations using unachieveable yields and pension transfer ‘advice’ given by people with no qualifications.
Similarly, investors face losses of up to £60 million following the liquidation of investment firm Arck LLP, which specialised in foreign property developments, using a firm called HD Sipp.
In fact, these scandals actually consist of two scams, so let’s break it down.
Switching out of an employer’s pension
The decision to switch out of an employer’s occupational pension scheme is nearly always wrong, particularly if it is a final salary one or the employer makes a contribution. Pension transfers were particularly common between 2008-2012 when employers set up enhanced transfer value initiatives, often involving cash bribes of up to 25 per cent of the transfer value, to encourage former staff to leave their final salary schemes. One way to look at it is that final salary pension benefits are clearly so valuable that employers have resorted to extreme bribes to get them off their books.
In June 2012, the Department for Work and Pensions banned cash incentives, but this has not stopped these practices altogether. KPMG, the accountancy firm, estimates that 2.5 million people will receive a transfer offer as firms look to cut pension costs, and around one quarter will accept the deal.
Former employees can actively request a transfer from a previous final salary pension. However, even if the employer is going bust you may be better off in the government’s Pension Protection Fund that will pay out around £31,000 a year.
Beware overly optimistic projections of the deal you could get elsewhere. Some financial advisers can be manipulative in the illustrations they give clients, using out-of-date estimates for factors such as life expectancy and rates of return.
Transfers from final salary schemes to individual plans linked with the stock markets are rarely in the member’s best interests. Final salary schemes are guaranteed, with an element of inflation linking and usually include a spouse’s or dependent’s pension.
The Financial Ombudsman Service recently revealed that complaints about advice around Sipps have risen by 26 per cent and that some 58 per cent of Sipp complaints were upheld – more than any other category.
As for cashing in early, the law states you cannot take your pension earlier than age 55 unless you work in a ‘special occupation’, such as footballers, models, jockeys and trapeze artists. If you do, HM Revenue & Customs will make an unauthorised payment charge of up to 55 per cent of any pension payment taken early.
The second leg of the scam is that ‘unregulated’ investment schemes are just that. There are no rules governing, for instance, borrowing powers, size and disclosure of fees, management of conflicts of interest, and a prudent spread of risk, nor any compensation if the scheme goes pear-shaped. Some schemes will be run by people who are well-intentioned, but some will be run by fraudsters who will make artificial claims for foreign assets such as agricultural land, timber or hotel complexes, that are patently false and may not even exist.
You could put your hard-earned cash into an asset that is nothing more than a ‘Photoshopped’ brochure, backed by a post box or answer phone. Money Observer investigated many such schemes in our ‘Behind the Ads’ series in 2011 and 2012.
Many small-time directors specialising in outlandish investment schemes have a string of failed ventures behind them, moving on from one scheme to another when the first misses some kind of important promised pay-out milestone such as a crop in agriculture or a timber felling, closing and setting up new companies as they go. The FSA is moving in on this, however, and following its consultation last August, is now considering a ban on unregulated collective investment schemes (Uciss) to ordinary retail investors, with a decision expected in the spring. Its own research found that only one in every four advised sales of unregulated investments to retail customers were suitable.
However, execution-only sales of unregulated investments will still be acceptable providing there has been no promotional communication, and sales to sophisticated investors will still be allowed, so the rules could still be circumvented.
One solution is to have a permitted investment list for Sipps, vetted by an impartial authority. Currently even good financial adviser firms give investments advertised on their own panels only a cursory vetting. That should change however as the FSA has made it clear that advisers are obliged to consider the unregulated investment as part of their advice to invest in the Sipp, not just the suitability of the wrapper.
In fact, Sipp providers are feeling hard done by as they will also be squeezed by having to meet higher capital requirements from 2014, and predictions are that the current 160 will shrink to fewer than 40 by 2015.
Unregulated investments: warning signs
•Beware high fees - anything above 2 per cent a year is too expensive
•Beware of anything that has a lock-up period of over one year
•Ask for proof of a similar scheme having made profits, and check the directors’ track record on one of the free websites such as www.company-director-check.co.uk
•If it is an overseas property or asset, try to find it using Google Earth
Transfer to a Sipp only if:
•Your existing company scheme is being wound up, and your pension would be worth more than the £30,000 or so a year you would receive from the Pension Protection Fund
•You have a personal pension with high fees and would like to transfer it to a cheaper plan
•You’ve accumulated several small pensions from different employers, and/or periods of self-employment and would like to amalgamate them.