Since pension freedom arrived in 2015, there has been a trend of pension savers being invited to invest their pots in unregulated products. Savers may be promised attractive returns, without being made fully away of the associated risks. Have you been contacted?
An open jam jar at a picnic brings creepy-crawlies. We know this, so we’ve learned to keep the lid on. Unfortunately, a lot of people at or near retirement are re-learning this lesson the hard way – this time with their life savings.
Retirement has undergone a revolution, such that many savers are struggling to keep up with the changes. Under the pre-2015 system, most people had to use their pension to buy an annuity, and so receive a steady (usually small) income for life. Post-April 2015, everyone with a pension pot can now access all the money from the age of 55.
But opening so many jam jars at once has had a nasty side effect. The threat of pension fraud has been extensively covered elsewhere – but actual fraud is only part of the problem. Almost as big a danger are companies who contact individuals to offer investment opportunities. These may technically be legitimate investments, but are generally unregulated, high-risk and often unsuitable for the pension saver being targeted. As a result, individuals have ended up losing much or even all of their retirement savings.
The dangers of unregulated investments and ‘advice’
A recent case that came before the financial ombudsman involved a company called Harlequin property. A client (referred to as Mr G) was encouraged by an unregulated adviser to invest his entire £48,000 pension into Harlequin – which resulted in his entire pension eventually being valued at £1.
The fact that neither Mr G’s adviser nor the investment company were regulated by the FCA is highly significant. With an FCA-regulated adviser or product, you as a client are protected if it can be shown that you have received poor advice that has resulted in you losing money. With an unregulated adviser or investment, there is no such protection, and the FCA is powerless to intervene.
Scams, or just bad investments?
Can such investment offers be classed as ‘scams’? It’s up for debate. However, if individuals are being offered ‘advice’ that is really a covert sales pitch, there is clearly an element of deceit. Furthermore, this so-called advice often has plenty wrong with it:
- It may not take account of the individual’s personal circumstances
- It may not assess their risk tolerance (i.e. how much they feel they can afford to lose)
- It may not make the individual aware of the risks of the investment
- It may not make any attempt to establish that this investment is the best option for the individual concerned.
Genuine advice takes all of the above factors into account, and will only then offer recommendations as to how you should use your pension pot. Another sign of ‘fake advice’ is if someone recommends that you put all of your savings into a single investment or asset class. This is putting all your eggs in one basket, which in investment terms is never a good idea. No genuine IFA will recommend this – and if they’re good, they should actively prevent you from doing so, should you ever be tempted.
How to become a financial expert overnight
Gaining access to your pension at 55 gives you instant control of (probably) the largest sum of money you will ever hold at one time. It is entirely up to you what you do with it – but a lack of experience of handling this much money may lead some people to make rash decisions.
You may be reluctant to ask for help and determined to make your own choices. Unfortunately, opportunists are aware of this and take advantage of it. One tactic of cold-callers is to flatter the individual as a shrewd investor, or make the investment sound like an exclusive opportunity open only to people who meet certain criteria. The sad truth is that these opportunists hope to take advantage of savers’ inexperience at a time when they are most vulnerable.
The majority of people are not experienced investors, and gaining access to a large sum of money does not make anyone into a financial expert overnight. However, it is very easy to hire your own independent expert to look after your interests.
The key benefit of engaging an independent financial adviser (IFA) is that you pay them to act solely in your best interests. They don’t take commission from providers or external sources, and all their fees have to be entirely transparent, like a solicitor’s. Furthermore, they are regulated by the FCA, which means you are protected if anything goes wrong. Armed with professional advice, you can make every decision the way an expert would.
When you first access your pension, you may attract a lot of unwelcome attention. Having your own IFA by your side will ensure that you make the right decision in retirement, so you can tell the scammers and opportunists to, well… buzz off!
This article was first published by unbiased on the 13th July 2016.