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Pension and investment scams

In their own blog, The Pensions Regulator (TPR) has set out some food for thought with regard to the ban on pension cold calling (and the scams which are associated).

Such issues were well publicised in recent months with the ‘Jetski ScamSmart advert’ from the Regulator and the Financial Conduct Authority (FCA) warning how your pension could end up funding the lavish lifestyle of someone else.

Key points from TPR’s blog are that “The arrival of the ban should bring clarity for consumers that if the phone rings and the caller asks unsolicited questions about their pension, it is an attempt to steal their savings” (and) “if they are in any doubt whatsoever, they should simply hang up”.

Wise words!

There are other resources to which they refer – fca.org.uk/scamsmart for example will give guidance, warning signs of scams as well as detail on how you can check on the authenticity of schemes.

Where an enquiry raises concerns, contact can be made with Action Fraud on 0300 1232040 or via www.actionfraud.police.uk

Scammers don’t come with a siren nor do they explain what they are doing is fraudulent. What they offer will seem very logical and feasible but may involve weird and wonderful investments (with very feasible reasons why they are a good idea), moving the funds offshore or potentially needing to set up a business so that a specialist pension can be arranged.

As they say, “Buyer Beware”.

Ultimately, no cold calls should now arise (however there are many who say the ban doesn’t go far enough).

If, however, you unexpectedly receive a call about your pension (or any other investment for that matter), seeking a second opinion whilst also using the above resources should ensure that any traps are unsuccessful and you keep hold of the funds you’ve spent time saving.

 

Article written by Paul Stocks (@paul_stocks_ifa), Financial Services Director and Independent Financial Adviser

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Our thoughts on the pension cold calling ban.

Today saw the introduction of a cold calling ban in relation to pensions (as outlined at www.bbc.co.uk/news/business-46799038)

Pension cold calling has been common place for a number of years: prior to the introduction of pension freedoms in 2015 this invariably focused on ‘pension unlocking’ – where people were offered the ability to ‘cash in’ their pension or to get ‘cash back’ – typically using weird and wonderful investments whilst being unaware of the significant tax penalties in doing so.

Since pension freedoms came into effect in 2015, assets in pensions haven’t needed to be ‘unlocked’ for the sums involved to be accessed and therefore attention seems to have turned to using the funds to invest in similar weird and wonderful (typically unregulated) investments and whilst the tax penalties may not apply, the risk of losses and fraud do.

Given that the majority of regulated financial advisers would not use unregulated investments, investors are typically introduced to such investments via unregulated advisers who use cold calling to engage with potential ‘investors’.

There are many examples of investors losing their funds either due to fraud or because the investments have not behaved as expected.

This legislation therefore serves to draw a line in the sand whereby making a cold call is now an offence and potentially subject to a £500,000 fine.

As Tom Selby (AJ Bell) states in the BBC article “Prohibiting cold-calling is only part of the solution and will by no means eradicate the threat of scam activity altogether. Pensions remain a juicy target for fraudsters and some will inevitably look to circumvent the ban or simply ignore it altogether.” He goes on to suggest “anyone who (receives) a call out of the blue about pensions to simply hang up the phone.”

Whilst this therefore may not be sufficient deterrent for those who are engaged in any fraudulent activity, it will hopefully enable investors to realise that if they are ‘cold called’, rules are being breached and therefore they are hopefully wary and on guard and that ‘hanging up’ may well be sensible.

 

Article written by Paul Stocks (@paul_stocks_ifa), Financial Services Director and Independent Financial Adviser

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Investment beliefs pt 1 – The dangers of a lack of patience

Warren Buffet is generally seen as a very astute investor but his investment philosophy is relatively simple and a quote attributed to him is perhaps something many should heed – “The stock market is a wonderfully efficient mechanism for transferring wealth from the impatient to the patient”.

Until relatively recently, the FTSE 100 had peaked in December 1999 and whilst it nearly breached 7000 points intra-day, its closing high stood at 6930 on the eve of the new millennium.

Since then, there have seen significant investment market headwinds – the dotcom bubble burst, the ‘second gulf war’ took place, the credit crunch arrived and the ‘great recession’ in 2008 soon followed and as a result, investment returns have been heavily dependent on their timing and whether you bought on a low or a high.

Investing is a long term process which involves stepping out from the security of cash and holding an asset which can go up and down in value with the aim that the risk taken will result in higher rewards – whether it be gilts (Government debt), Property (residential or commercial), bonds (corporate debt), or equities (company shares) – no investment is ultimately guaranteed and at the time an investment is made, there is no way of confidently knowing whether you are buying at a good or bad time.

Investment markets are fluid – absorbing huge amounts of information and converting that into an expectation which in turn drives investment values however sentiment will result in excessive highs (bubbles) and lows.

Those who invested at the ‘bottom of the market’ only know that with hindsight – likewise the same also applies to those who invested at the top and whilst both may have made ‘the right’ investment decision, external factors no one can ultimately influence will have an impact – however, the longer the investment is held the less important the timing generally becomes.

A very simple investment philosophy is to buy low and sell high – doing so returns a profit – and yet, time and again people will speak to us about a ‘no fail’ investment they are seeking our views on – often something which sounds too good to be true which has recently made lots of money and they want to get a piece of the action.

When things then don’t go to plan, they often panic, sell and regret investing in the first place.

Essentially, buying high and selling low.

Investing requires conviction and a belief and, in our view, completely differs from speculation. Speculating is taking a punt and trying to second guess something. It’s not an approach we feel will predictably build financial wealth.

Investing on the other hand is stepping away from the security of cash and seeking greater longer term returns due to the fundamental nature of financial markets – risk should be rewarded (as, if it isn’t, why would capital markets take the risk).

If an investment is sensible and appropriate but the markets turn against the investor – it doesn’t mean that the investment is no longer sensible and appropriate – it is more likely that short term noise is drowning out the fundamentals of investments and it is also reasonably likely that, given time, things will revert to type – the danger is that, by then, some may have ditched their investment and destroyed some of their capital in the process – potentially being one of those who have transferred their wealth to the likes of Warren Buffet.

As investment advisers, we take significant steps to ensure any investment risk taken is appropriate – both in terms of being able to take the risk and the risk levels being appropriate for the individual.

By managing the risk and ensuring the client has a pragmatic view of the investment process, we aim to ensure that clients don’t buy high and sell low and that, over time, they are the beneficiaries of our patience and that their wealth, as a result, benefits.

We don’t profess to know which way markets are heading and whether now is a good time to invest; what we do understand, however, is that ensuring any risk being taken is appropriate and that, given time, good investments will typically behave as expected even if, initially, things work against the investor.

So the next time patience wears thin, consider seeking advice before selling an investment as it might be that the investment is perfectly acceptable and suitable, and that you are running the risk of buying high and selling low.

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The risk of last minute ‘Auto-Enrolment’ shopping!

Many of us will have left the Christmas shopping a little too late – perhaps resulting in a quick dash to the shops or supermarket which results in us sitting gridlocked in a car park, stressed in the aisles, not having the choice we want and pulling our hair out at the checkout before getting in to the ‘after sales’ gridlock of that car park again.

Just like we all know when Christmas Day falls, we can also check when a firm will need to have satisfied its obligations with regard to Auto-Enrolment (AE). Just like Christmas, AE will take time to plan which is why The Pension Regulator (TPR) initially issues a ‘wake up’ letter to businesses 12 months before a firm has to have everything in place.

All companies can easily establish the date they need to have satisfied their obligations – something determined by either their size (if over 30 employees in April 2012) or their payroll reference number (if smaller).

For companies falling into the latter category, they will need to have everything in place at some point between June 2015 and April 2017 and whilst these dates creep ever nearer, the number of employers needing to tackle this begins to increase significantly

If you don’t already know, get your AE shopping list ready – your payroll reference number(s) in other words – and visit TPR’s calculator at http://bit.ly/1cOdWnm

In tax year 2014/15 there were approximately 32,000 employers required to meet the new legislation and this number rises to just over 150,000 in 2015/16 before the risk of ‘queues at the checkouts’ gets much worse with over 610,000 firms in 2016/17 and a further 530,000 in 2017/18.

We are already hearing about ‘capacity issues’ with some providers and the expectation is that those seeking advice from firms such as ours may also find themselves at the back of an ever lengthening queue as reality takes hold and the last minute panic buying takes hold.

But fear not; to beat the rush and to shop with leisure, companies may well wish to begin to plan ahead and do much of the hard work now and then sit back and watch as others live to regret not heeding our words of warning….

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‘Unknown Unknowns’ … part 2 – PIPs (of the Pension variety)

Update July 2015 – in the ‘Summer Budget’, the Government announced a change to Pension Input Periods (PIP) which essentially brought the rules (which became effective immediately) in line with what most non-pension ‘consumers’ assumed all along – that the PIP is aligned with the tax year end. The Government also removed the ability to end PIPs early.

Like it or not, everyone’s PIP ended at midnight on 8th July 2015 and a new PIP opened up on 9th July which will then end on 5th April 2016.

I leave the following article as a testament of  ‘what once was’ given that this serves to demonstrate not only how things are not always as they appear, but also that legislation change is the norm for pension and broader financial planning…..

Original article: Pensions are (perhaps) one of the most complicated tax wrappers known to mankind – not only are they a source of amusement to politicians of all colours as a result the constant tinkering with various rules, attributes and regulations but they are also a source of huge misinformation and misunderstanding (but I’ll save that soap box rant for another day).

The irony is that not only can they be very complicated, they are also very useful – not least as a result of wide sweeping changes due to take effect next week which result in significant flexibility, increased tax effectiveness and the ability to pass wealth on between generations (again, something else I’ll save for another day).

So back to the task in hand – the wonderful world of PIPs…. not quite as complicated as quantum physics but not far short of that weird and wonderful subatomic world.

I wrote previously concerning the concept of ‘unknown unknowns’ (see here) – one area of particular ‘danger’ when it comes to pensions is the fact that the end of the personal tax year (i.e. 5th April) has virtually nothing to do with the amount that can be funded into pensions on an annual basis.

The amount you can fund is down to the Annual Allowance and how this is calculated is actually down to the Pension Input Period (the ‘PIP’) of the scheme/plan to which the payment is being made (i.e. NOT the tax year end).

The current annual allowance is £40,000 and therefore if someone funded £40,000 on 1st April 2015 (i.e. in the current tax year) and a further £40,000 on 20th April (i.e. in the next tax year) these are very likely to both form part of the same PIP and thereby that individual would have breached the Annual Allowance of £40,000 given that £80,000 has been invested.

However, as another example, two payments of £40,000 (i.e. a total of £80,000) could be made on 1st April to two different schemes (with different PIPs). This would initially seem foolish given that the Annual Allowance is £40,000 however if one PIP ended on 1st April and the other on 20th April then this £80,000 would be permissible given that the PIPs ended in different tax years!

I am sure that the notion of PIPs is alien to the vast majority of people who are funding pensions, but for those who are making significant contributions, this is something they need to be very aware of given that exceeding this would result in a tax charge (and in most circumstances, making the excess contribution arguably pointless).

Furthermore, aggressive funding can be achieved by clever use of PIPs (as demonstrated in the £80,000 example above).

Bring into the equation that those with multiple policies will have multiple PIPs, that the Annual Allowance has changed on numerous occasions recently, that unused allowances from previous years can be carried forward and that PIPs can be changed, then a simple question of ‘how much can I pay into a pension this year’ becomes a mammoth task of data gathering and ‘Annual Allowance testing’ before an accurate answer can be given.

So next time you ask a Financial Adviser the seemingly simple question ‘how much can I pay into my pension’ please don’t be surprised if you see their body slump a little as they take a deep breath and begin with…. “well, it’s complicated because….”

Alternatively, if they are quick to answer £40,000 you might want to flex your pension muscles and ask them ‘but what about my PIPs’!

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Missing the pension point?

In the run up to the changes to pension legislation, much of media (and political) coverage focused on costs and freedom. On the one hand, Ed Miliband seemingly couldn’t mention pensions without also using the term ‘rip off’ (Telegraph, Guardian, FTAdviser) whereas on the other, it would appear that Lamborghini (BBC) would be very busy come April….

5th April 2015 came and went and not a great deal changed for many – other than the small matter (for those interesting in facts rather than) that pensions suddenly became significantly more flexible and, potentially, even more tax effective.

Prior to April, pensions were primarily used to provide income in retirement; either a guaranteed income (an annuity) or an income which isn’t guaranteed but could potentially be paid at a higher level (drawdown).

Pensions, therefore, were all about providing an income stream and they essentially helped people defer income until a later date (and hopefully to a time where they pay less tax).

On death, funds in payment would either be taxed heavily (55% on lump sum death benefits in drawdown), potentially lost (if no death benefits were arranged on an annuity) or paid to a dependent. Dependent here being the key word – once benefits were drawn, the scope to pass on benefits became restricted and, potentially, subject to significant tax.

Moving on, we’re now in a new world….. two key things have changed.

Firstly, pensions do not have to provide income – funds can be withdrawn as the recipient sees fit and whilst the technicalities of this are outside the scope of these musings, the principle is that a quarter of those funds are tax free and the rest is taxable as income – irrespective of whether that ‘income’ is taken on the drip or as a lump sum.

At a stroke, this opened up control and flexibility…. and in turn, tax management opportunities.

Someone in semi retirement can top up their income using their private pension whilst they wait for the state pension date to arrive and if personal income tax allowances aren’t being fully used, funds can be withdrawn and whilst taxable, the proceeds would be tax free as far as they fall within the personal allowance (See here).

This also removed what could sometimes be seen as a hurdle to pension planning – the notion that you lose control of capital – whilst the fact remains that benefits can’t currently be accessed until 55 years of age at the earliest, thereafter access and control awaits the investor.

Secondly, there is much more control, choice and potentially tax effectiveness with regard to lump sum death benefits. For starters, if death occurs prior to 75 years of age all death benefits are now tax free – potentially saving the beneficiaries of those in drawdown a 55% tax charge on lump sum death benefits OR avoiding income tax where benefits are received on the drip.

Alongside that, it is now the case that income can be passed to non-dependents – anyone in fact – providing the provider permits it and you make the necessary arrangements to request it. What’s more, there is no tax charge on the transfer of assets to the beneficiary – giving them scope to ‘inherit’ the pension fund.

This therefore opens up the notion of ‘family pensions’ where funds could cascade between generations – something many may well see as a useful development.

Therefore rather than funds heading for the exits, our experience is quite the opposite – pensions are now even more tax effective than ever. Not only do payments attract Government tax relief, the funds still grow tax effectively and are generally are not liable to Inheritance Tax.

Once withdrawals are needed, a bit of planning can help to mitigate income tax as far as is possible – with funds now being withdrawn as and when needed.

As time moves on, there should be peace of mind that, when the time comes, the funds can pass on to other generations – providing the necessary steps are taken by the policy holder to arrange this – potentially giving the beneficiaries a head start to their own retirement planning.

The very nature of pensions has therefore changed and for many they may well need to look again at the opportunities they bring and whilst the treatment of their funds on death may be at the back of their thoughts, this may in fact need closest attention given that unless adequate steps are taken, the beneficiaries of the funds may find that they are unable to take advantage of the new rules.

Therefore rather than getting overly excited about sports cars or getting depressed about ‘rip off charges’, perhaps the message should be much more positive – financial planning has suddenly been blown wide open and, more than ever, people have the opportunity to live the retirement life they have perhaps always dreamed of.