Managing your own pension fund is challenging enough amid volatile investment markets and rising charges. Now the Serious Fraud Office (SFO) is warning that the self-invested personal pension (Sipps) market has become vulnerable to fraudulent abuse.
According to the SFO, the majority of frauds involving overseas property or bio-fuel investments are aimed at Sipp investors. Typically, they are encouraged to disinvest their pensions and put the money into highly speculative schemes. The £52m GP Noble pension scheme fraud is one of the largest examples, with 2,000 investors losing up to £40m in an insolvent biofuel company.
According to Jane de Lozey, joint head of the fraud business area for the SFO, schemes under investigation have targeted investors seeking high returns or to release money from their pensions, putting around £200m at risk.
The main areas for investors to watch out for are unregulated collective investment schemes (Ucis) and pension liberation schemes, deemed illegal by the high court last year, that offer a cash incentive to release a pension before the legally approved age of 55.
While not all Ucis are bad, the risk of entering one is that while it may offer higher returns than traditional investments, there is no coverage from the Financial Services Compensation Scheme (FSCS) if things go wrong.
However Philip Bray, marketing and relationship manager of Investment Sense, says this practice is clearly against HMRC rules as the member is benefiting personally from the investment, when any investment should be entirely for the Sipp's benefit. "We would suggest that any investor who is offered a personal incentive as a way of accessing their pension before the age of 55 remembers that they are breaking HMRC rules and could end up having to pay hefty tax charges as well as putting their future retirement income in danger," he adds.
While loans to a third party are allowed in a Sipp, if any funds are lent to members or people connected to them, this could result in a tax charge of between 55 and 70 per cent of the loan.
Due diligence
The Association of Member Directed Pension Schemes has recommended that investors sign a declaration to the provider that they are not receiving incentives for entering an investment.
Andrew Roberts, chairman of Amps, and partner at Barnett Waddingham, said: "One way around this is to ask for a sign-off that no money is being received for entering a particular investment.
"If you are receiving cash back from a pension scheme, you need to be discussing that with your pension provider to ensure that it is legitimate."
Sipp providers have also stepped in and are trying to support investors on this by conducting their own due diligence, and using firms such as the SIPP Investment Platform to assess funds.
Mr Roberts said Barnett Waddingham had turned down requests for investments in forestry, carbon credits, fractional land ownership and overseas property in the past 12 months.
He said investors should look out for who is behind the Ucis they are investing in, what is its history and investment and exit strategy, adding: "If you have £50,000 in your pension fund, you may be able to go into a forestry fund, but you have to question if you want your whole fund to go down to zero."
Mis-selling of Sipps
Investors are being warned to be wary of alternative investments marketed by unregulated firms, including those based overseas, which are complex or look 'too good to be true' guaranteeing high, often double-digit, returns. Always check whether the investment is regulated in the UK by the Financial Services Authority (FSA) and whether the advice to make such an investment comes from a regulated UK adviser.
"Our experience tells us that the speculative nature of these schemes, which seem to usually involve property, bio-fuels, or land, means that they are unsuitable for the vast majority of investors and are often marketed to people who have little or no investment experience. The people selling these schemes are rarely regulated and often play on an investor's mistrust of pensions, the volatility of stock markets, often promising double-digit, guaranteed, returns; which may seem irresistible to an inexperienced investor," says Mr Bray.
The FSA is conducting a thematic review of Sipps, with findings to be released in the next couple of months. Fraud is one aspect the regulator will be looking at.
Mr Bray said: "Worryingly we have seen examples of people being persuaded to transfer valuable final salary or defined benefit pensions into a Sipp so that they can then make 'alternative' investments. The FSA's stance is that it is rarely in the interests of a member to transfer out of such highly secure pensions and that any advice to do so should be treated with the utmost scepticism."
