Stricter laws designed to protect people from pension scams came into force on 30 November 2021.
The rules will now allow pension companies to prevent a transfer if suspicious activity is detected.
The Department for Work and Pensions (DWP) introduced a traffic light-style system under which providers can stop transfers altogether (red light), or pause it for further scrutiny (amber light) where savers will need to seek guidance from Pension Wise before going ahead.
But some are concerned about an “overzealous” blocking of transfers, even if legitimate, which could have the opposite effect, and still hurt consumers as a result.
Tom Selby, head of retirement policy at AJ Bell, said: “New rules coming into force today provide savers with an extra layer of protection from the scourge of pension scams. If applied proportionately, they will hand more power to providers in blocking suspicious transfers while allowing the vast majority of legitimate transfers to go through as normal.
“The one lingering concern is the extent to which all providers will apply common sense when interpreting the rules – specifically around the so-called ‘amber flag’ warnings.”
Red, amber, go?
Selby explained: “Where an amber flag warning is raised, this indicates the provider believes the scheme the member wants to move their retirement pot to may be a scam. The member will then be required to obtain guidance from Pension Wise before transferring.
“Anyone who goes through this process will have their transfer slowed down significantly, which is why the government has avoided being overly specific when setting out when an amber flag should be raised.
“For example, the amber flag rules say overseas investments could be indicators of a scam. However, the fact virtually all defined contribution (DC) schemes allow overseas investments which aren’t linked to scams obviously means this shouldn’t in-and-of itself cause providers to insist transferring members must seek Pension Wise guidance before proceeding.
“It would be ludicrous in the extreme to force every person who transfers and intends to invest their retirement pot in a non-UK company like Amazon or Tesla to take anti-scam guidance before doing so.
“The point of the new rules is to give providers more power to stop – or at least stall – transfers where their due diligence raises legitimate concerns.”
Keep freedom of choice
Selby added that such rules are expected to be applied with some “common sense”, as per the government’s guidelines.
“Despite this, there have been some suggestions pension schemes might take an overzealous approach to amber flag warnings because they are risk averse,” he said.
“Anyone going down this road leaves themselves open to complaints to the Ombudsman. While protecting members from scams is extremely important, people making legitimate transfers will not stand for unjustified delays.”
Becky O’Connor, head of pensions and savings at Interactive Investor, said that the pension industry should not lose sight of what pension transfers are actually for: “seeking better value or a wider range of investments” for savers, and their freedom to choose authorised and regulated providers should be maintained.
