In the month after pension freedom was introduced in April 2015, the City of London Police revealed pension scam losses had more than trebled to £4.5m from £1.4m. With everyone aged 55 and over now able to take their full pension as cash, there were always going to be some people who saw this as an opportunity to scam.
Unfortunately, it is always the same old story, with conmen identifying an area where people are vulnerable, and swooping in with an offer of ‘guaranteed’ returns. WEALTH at work has created a list of common investment scams of recent years. It should be noted that some scams are actually illegal whereas others are not illegal but are unlikely to give the returns suggested.
Common investment scams
- Carbon Credits. This one keeps reappearing and plays on an individual’s interest in ethical investment. Businesses buy credits to offset their carbon emissions and these are traded, but conmen sell them at a price far higher than their real value, and traders are unlikely to be interested in buying such small volumes.
- Death bonds. Individuals are encouraged to invest in funds that buy second-hand life insurance policies. The terminally ill pensioner agrees to sell their policy for a lump sum that is lower than the amount that would payout when they die. The ‘investor’ then receives the insurance payout when they die. However these ‘low-risk’ investments fail when policyholders live longer than expected, and money can be tied up for years.
- Forestry. Forestry scams have been big business as many people like the idea of investing in something that is ethical and good for the environment. However, there is a famous story of investors going to visit one of the forests they invested in. All looked good on arrival, but locals suggested that they fly over the site to really look at their ‘investment’ and found that the forest was shaped like a donut with no trees in the middle.
- Land banking scheme. The Financial Conduct Authority (FCA) estimates that investors have lost more than £200m to these scams. Investors are told that they have the opportunity to buy land on which development is going to take place, which will make them a fortune. However, often there are no plans for any development and the land is worthless.
- Loans. There are many legitimate peer-to-peer lending schemes, where savers are matched with individuals who want to borrow money. However, it is important to check that the scheme is regulated, otherwise it is difficult to know if money is going to a creditworthy borrower and monthly reports can be faked.
- Ostrich Farms. In the mid-1990s fear about ‘mad cow disease’ was played on by conmen. Thousands of people invested believing that ostrich meat would become popular in the UK. Some were legitimate investments but many were scams, with orders taken for non-existent ostriches, and millions of pounds were lost.
- Ponzi schemes. Ponzi schemes are one of the biggest scams of all time. There is no actual investment, and instead investors are paid returns with their own money, or money paid by subsequent investors. These can go on for years until the number of new investors dries up and the scheme collapses. These are often referred to as pyramid schemes.
- Precious metals. Conmen often promote investment in precious or rare metals. It is unregulated, and often the product doesn’t actually exist. The scammers know that investors are unlikely to visit the ‘gold mine’ and instead trust that it does exist and that it is actually producing gold.
- Structured products. Structured products offer returns based on the performance of underlying investments and are marketed as a way for cautious savers to get better returns than their bank account, without the risk of equities. The returns however, depend on stock-market returns being met and many companies have been fined for mis-selling. There are some structured products which are not scams, but it is difficult to tell them apart.
- Storage Pods. Investors buy a long lease on a storage pod or unit with the theory that people will always need storage. However, these investments are unregulated, and there is little evidence that the high rental yields promised have ever materialised.
Jonathan Watts-Lay, Director, WEALTH at work, said: “The Pension freedoms are good news for individuals, however, many employees simply don’t know what their retirement income options are. Sadly, this is the perfect market for scammers. I hope that this list will warn employees of the things to look out for. Many people have been caught out by scams like this; unfortunately they weren’t the first, and sadly they won’t be the last. Increasingly we work with employers to educate their employees, who are approaching retirement, on the key considerations when deciding on how to generate income in retirement.”
He added: “The rule is, whatever investment employees are planning to make, they should check out the company with the FCA first. If the FCA hasn’t heard of them, individuals will have no place to go if they turn out to be fraudsters. The FCA’s ScamSmart website also includes a warning list of companies for employees to be aware of.”