FSA Warns Over Unregulated Investments In SIPPs: 3 Scams To Avoid
The Financial Services Authority (FSA) has issued an alert warning about the dangers of investing in unregulated investments within a SIPP (Self Invested Personal Pension).
The FSA is concerned that advisers are recommending unsuitable transfers, from existing pensions into SIPPs, in full knowledge of the fact that the pension fund will be invested in unregulated investments. The adviser then ‘turns a blind eye’ to the suitability of the investment and takes no responsibility, leaving the investor unable to complain if the investment fails.
The FSA has warned that it will crack down on Independent Financial Advisers (IFAs) who don’t advise on both the pension transfer and the proposed investments to be held within the pension.
We welcome the FSA’s investigation into the advisers, many of whom are leaving investors worse off by moving them into inappropriate SIPPs and then taking no responsibility for the investment. Over the past year or so we have seen a rise in pension scams, which will leave many people significantly worse off when they retire.
The three pension scams you need to avoid:
Final Salary transfers
Final salary pensions, such as those run for the emergency services, the NHS, local authorities and many large employers, offer a guaranteed income in retirement which is linked to an employee’s salary and inflation proofed, so that the income rises each year to try and maintain the buying power.
Even after an employee has left their job and ceased to make contributions, the annual pension income will continue to increase until they retire; meaning that the pension is still ‘working for you’. However, unregulated advisers are recommending that people should transfer their preserved final salary benefits into SIPPs and then make risky and unregulated investment.
Anyone with a final salary pension should think very hard before they transfer out, such a move will hardly ever leave you better off in retirement and could significantly reduce the income you have to live on when you finish work.
We’ve seen an increase in the number of ‘advisers’, who should probably be called sales people,’ recommending people make unregulated investments and transfer out of pensions which are already suitable for their needs.
An unregulated investment is generally much higher risk than a traditional investment, they are often illiquid, meaning it can be hard to get your money back, and are often hugely complicated.
Furthermore, these types of investment are often sold by unregulated advisers, who are not authorized by the Financial Services Authority (FSA), leaving investors with no recourse to the Financial Services Compensation Scheme (FSCS) or the Financial Ombudsman Service (FOS) if something goes wrong.
This is a term given to schemes which purport to give you access to your pension before 55; the earliest you can take benefits from the vast majority of pensions.
There are very few occasions, usually involving ill health, when it is possible to get access to your pension before the age of 55. Despite this, ‘pension liberation’ schemes advertise early access to your pension.
Such schemes are dangerous, not only are you giving up your retirement income, you will pay high costs as well as a tax charge, which is generally never mentioned, of between 55% and 70%.
Avoiding pension scams is easy
It really is pretty easy to avoid falling for these pension scams. Firstly, only take advice from an Independent Financial Adviser (IFA), regulated in the UK by the FSA. Secondly, if the IFA recommends an unregulated investment or you transfer from a final salary pension you should always take a second opinion. Finally, make sure you see an adviser who charges fees for his or her work, and not commission, this way you can be sure that the advice will be unbiased, because the adviser will get paid whatever advice they give.
Remember, above all, if it sounds too good to be true, it probably is; just walk away!
Phillip Bray writes for Investment Sense and looks at how to avoid being scammed out of your SIPP pension.