Pension Fraud

Pension fraud

Also known as pension scams - refers to schemes where fraudsters trick individuals into transferring their pension savings to fraudulent investment and pension schemes. The weaknesses in the regulatory landscape in 2010 enabled fraud and dishonesty through HMRC-registered bogus occupational schemes. These schemes were exploited by fraudsters and marketed to victims via FCA-accredited advisors, creating the false impression that they were legitimate personal pension plans. HMRC operated an online application process which allowed anyone to register a new occupational pension scheme. There was no requirement for those registering to prove that they had any experience in financial matters pertaining to pensions, tax laws and regulations.

History of Pension Fraud

Pension fraud began to rise significantly in the early 2000s, coinciding with careless changes in pension regulations that set out to offer individuals more flexibility in managing their retirement savings. Fraudsters capitalised on these regulatory changes, exploiting loopholes and the general lack of awareness among the public about pension rules and protections.

Victims of pension liberation fraud face severe financial and emotional consequences, including:

• Financial Losses: Victims often lose a significant portion, if not all, of their pension savings. These funds are typically siphoned into high-risk or non-existent investments, resulting in substantial financial losses.

• Tax Penalties: Unauthorised access to pension savings incurs heavy tax charges, often up to 55% of the transferred amount. Victims are left with the loss of their pension, substantial tax bills, interest and penalties with vast numbers of victims facing financial ruin. Ben Fairhead comments 'we must not lose sight of the unfair and inconsistent way in which members of these schemes have been taxed...there are imperfections that must be addressed to ensure that compensation comes through for members more quickly.'

• Emotional Distress: The stress and anxiety resulting from financial ruin and significant tax bills has led to severe mental health issues, including depression and anxiety. The loss of financial security for retirement adds to the emotional burden.

• Legal Battles: Victims may face prolonged legal battles to recover their funds, which can be both costly and emotionally draining, with no guarantee of success.

In response to the rising cases of pension liberation fraud, the Work and Pensions Select Committee conducted an inquiry into the issue. The inquiry aimed to investigate the scale of the problem, the effectiveness of current regulations, and the support available to victims.

The Committee's findings highlighted several key issues:

Inadequate Consumer Protection:

The inquiry found that current regulations are insufficient to protect consumers from increasingly sophisticated pension scams. The Committee emphasised that "The Financial Conduct Authority must ‘raise its game’ and publish information about its enforcement action, with the Committee hearing numerous criticisms that it is not effective in stopping scams, punishing scammers or retrieving scam proceeds."

Need for Greater Awareness:

"The Committee underscored the need for increased public awareness and education about pension scams, highlighting that sophisticated scammers continue to exploit new situations, including the COVID-19 pandemic."

This aligns with the broader recognition that more needs to be done to educate the public on the risks associated with pension freedoms and the tactics used by fraudsters.

"The Committee recommends that stricter penalties for fraudsters, enhanced regulatory oversight, and improved support for victims are essential to tackling the rising issue of pension scams effectively."​ Additionally, the Committee proposed "Project Bloom, the multi-agency task force, should be given a statutory remit, renamed the Pensions Scams Centre, and given dedicated funding and staffing to manage a pensions scams intelligence database alongside law enforcement."

In his letter to John Glen, the Economic Secretary to the Treasury, Sir Stephen Timms, Chair of the Work and Pensions Select Committee, raised significant concerns regarding HMRC's handling of pension liberation fraud victims. Timms sought clarification on several key issues, particularly regarding the application of tax charges on victims of pension scams.

Timms questioned whether HMRC was monitoring the consistency and fairness of its approach, particularly in applying unauthorised payment charges, which can reach up to 55%. He highlighted that while these charges are legally justified, they often lack empathy and understanding of the financial and emotional impact on scam victims. The Committee recommended that HMRC use its discretion more effectively to alleviate the financial burden on victims, and Timms inquired about the potential for legislative changes if HMRC is unable to adjust its current practices.

John Glen responded by asserting that there is 'no justifiable basis' for HMRC to exercise discretion beyond the existing legal framework, emphasising that the law requires HMRC to collect these charges where applicable. However, Glen also noted that HMRC does offer enhanced support to affected individuals through payment arrangements​. His rigid stance demonstrates a concerning lack of empathy and understanding toward the victims, many of whom were unknowingly drawn into fraudulent schemes which were registered with HMRC. Given the extraordinary nature of their circumstances, where victims were misled and their pensions put at risk, special consideration and leniency should be exercised. The financial and emotional toll on these individuals is significant, warranting a more compassionate and flexible approach rather than strict adherence to the current legal provisions.