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Annuity payment scams: what are they and how can they be avoided?

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Annuity payment scams are sadly more common than one might think. In general, the annuities market isn’t consumer-friendly: according to research from Britain’s Financial Conduct Authority, 80% of those who take out annuities from their standard pension company provider didn’t receive the most value for money possible. And on illegal scams specifically, research shows that older people constitute three-tenths of scam victims – meaning the annuities market can be a key node in the scam network. And for those who do fall victim, it can a life-changing problem. Some older people have lost their life savings as a result of buying a scam annuity, while others have found themselves having to change their life plans or deciding to work later due to losing a chunk of savings worth thousands.

Luckily, however, there are ways to cut down on the risk that this kind of investment scam will happen. By informing and educating each other about the basics of an annuity scam, it’s possible to learn to pick up on the hallmarks of these criminal enterprises and report them if an agent approaches someone older and vulnerable. People can also learn to practice basic financial safety habits, such as always treating potential deals with a healthy dose of scepticism and ensuring that a trusted friend or family member is on hand to offer advice. This guide will explain just what an annuity payment scam is, and what specific steps people can take to ensure that no financial losses occur.

What is an annuity?

First off, it’s important to be sure that the full picture is present on what actually constitutes an annuity, as it’s hard to understand what constitutes a scam of this type until the basics are clear. An annuity is basically a retirement savings product which can be purchased: once one is in place, it will pay out an agreed rate for the rest of the holder’s life. Sometimes, annuities will payout for life no matter how long the person lives, while sometimes they will only payout for a particular number of years. On other occasions, annuities will be joint with a partner or spouse – and sometimes they can get more valuable as time goes on, while sometimes they will remain stagnant. Whichever one is opted for, it’s worth exploring if the owner highly values security and the knowledge that they can plan their finances to a detailed extent as they approach retirement. Some financial advisors will advise against taking out an annuity, however, as it could well turn out that the holder would have made more money had they invested elsewhere.

Depending on the region the holder lives in and the retirement market they’re using, an annuity scam may look slightly different. In some countries where lump-sum payouts at a particular age (such as 55) are popular, annuities are quite common. In places where state-sponsored social provision is common, annuities may also be less common. But in most markets, people will be able to find an annuity opportunity if required. It’s worth noting here that annuities are not necessarily bad, and that in many cases they have proven themselves to be effective ways to invest in an older person’s future. But they are not right for everyone – and because they on the face of it offer “security” for those who take them out, those who might consider taking them out could easily get fooled.

Why investors get fooled

There are a whole host of reasons why an investor in an annuity payment scam might experience that sinking feeling which alerts them to the fraudulent nature of the transaction. The first thing to note is that falling victim to a scam does not mean that the victim is stupid, or that they are to blame. Annuity payment scam artists are highly effective operators who can manipulate even someone who is otherwise highly intelligent, and they are always the ones to blame for committing crimes. Annuity payment scams can be sophisticated operations, and sometimes can be the method of choice by those involved in organised crime.

The rise of the Internet and the decentralised nature of Internet content has meant that convincing websites and social media posts which appear to be from legitimate payment providers can be easily created. And while no annuity scam victim is at fault for what happened, sometimes it can be made easier if the potential victim has a degree of financial illiteracy. If a person doesn’t know to check to see whether a potential annuity provider is licensed by the relevant financial market’s regulator in their jurisdiction, for example, they may be more at risk.

Who are the likely victims?

By their nature, annuity scams, unfortunately, affect older people more often than others. This is because annuities are products purchased by those who have built up significant pension pots, or who are intending to do so. This matches the broader trend, which shows that older people tend to be more likely to become victims of all kinds of scams – not just annuity payments ones. This is often because older people have less experience of navigating the tricky waters of a scam and may be less confident (or more desperate for a solution to be in place) due to their advancing age and the higher risk of health problems.

Some groups of seniors or older people are particularly vulnerable to an annuity payments scam. Those who are physically unwell, for example, are often likely to be approached by someone peddling a scam annuity product. In some reprehensible cases, there have been incidents of scammers approaching those who have been diagnosed with a terminal illness and deceiving them into investing into a scheme which will only cash out many years after their death – and, hence, will never be able to get their cash. And it is also sadly the case that some scam annuity artists will target those who experience mental or neurological problems associated with old age that reduce cognitive function, such as Alzheimer’s disease. In these cases, the scam artist may find it easier to persuade someone to part with their cash.

What happens during an annuity payment scam?

The mechanics of an annuity payment scam tends to follow the below trajectory. An older person or a person who is planning for retirement will be approached by a scammer posing as a representative, a financial planner or something similar. This person may come from an agency, or at least from an organisation purporting to be an agency. Alternatively, they might claim to be independent, and emphasise that this means they have a decent fee structure in place or access to the whole annuity market. Sometimes, the connection might be established through printed or online marketing materials. According to the Pensions Advisory Service: “Pension scammers are clever, using flashy websites and marketing materials to lure you in.”

Once the initial relationship between the senior and the scammer has been established, the next phase is often to employ fear tactics. Retirement is such a sensitive and at times worrying issue, and there are often fears in place which can be preyed upon by unscrupulous scammers. Take the following example: if a person has a self-invested pension, they are likely to know for sure how much cash they have in the bank. They may have a rough idea from a financial advisor of what their annual cash returns will be. However, if the rate of return is not enough to cover monthly bills comfortably or to enjoy the finer things in life, they may be worried that they will deplete so much of the capital that by the time they turn, say, 75 there will be none left. Or they may worry that the rate of interest which they currently enjoy on their savings will not last forever – and they could well be right.

In this example, there is very fertile ground for the scammer who can start to plant seeds of doubt in the senior’s head and encourage them to believe that they are going to lose their retirement cash if they don’t opt for the security of the annuity product. The scammer, of course, will then use this opportunity to emphasise their own annuity “product”, and will try to persuade the senior to move their cash into this particular destination.

However, this is often not enough to push the fraud over the line, and scammers will use other tricks to help encourage people. They may, for example, create the illusion of significant discounts in the event that the target signs up there and then, a trick sometimes called “bonus fraud”. Or they may use complicated language which confuses the potential client: by throwing around terms such as “investment linked” or “maturity amount”, the scammer can quickly build legitimacy and encourage people to be much more trusting than they actually are.

Frustratingly, several different types of annuity payment fraud have emerged in recent years – and it’s not nearly as simply as just looking at the basic model of pressuring older people into choosing a scam model. Sometimes, even legitimate products can be roped into annuity scams. Take the example of “churning agents”: this particular subset of an annuity payments scam sees a client being advised by a scammer to swap their current legitimate annuity product for a new legitimate one, often on the false pretence of saving cash or something similar. However, this is usually done by an unscrupulous agent who stands to benefit financially from the move, as they will be able to receive commission from the action.

And the same goes for the so-called “secondary annuity market scam”. This is only a risk if the person involved has an annuity which can be liquidated and cashed out as a lump sum. Sometimes, a scam provider will tell the older person that they can only receive the value of their annuity in a lump sum if they pay part of it in a fee. However, this could be an opportunistic lie: if an annuity holder’s arrangement with their provider states clearly that the holder will receive all of the value of the product without a deduction for fees, any claim to the contrary could well be fraud.

Some tips to avoid annuity payment fraud

There’s no surefire way to avoid annuity payment fraud, although there are definitely some tips a person can follow to reduce the chances of it happening to them to as close to zero as possible. First off, it’s important to develop a sceptical mindset around any significant financial transaction. When an annuity payment scam artist approaches a senior, he or she is likely to exaggerate the offer. In this particular type of investment scam, the scammer may not emphasise high returns. Instead, they are likely to emphasise security and try to prey on those feelings rather than encourage feelings of greed. If a person notices that the seller of a product is emphasising this or applying pressure, they should know to either avoid them altogether or at least carry-out lots of due diligence.

Taking time is also a good move. The Pensions Advisory Service recommends that a person should “never be rushed into making a decision about your pension. It’s your money and your choice. If an offer sounds too good to be true, it probably is.” An older person should also always be sure that they know how to check out a provider. In the UK, most providers of financial services need to be licensed by the Financial Conduct Authority (FCA) or a similar organisation. If the older person or a trusted loved one is able to check the register online, they will be able to check whether the annuity provider is licensed or not. And if they feature on the FCA list of “unauthorised firms and individuals”, that’s even more of a reason to avoid them.

As an older person, maintaining relationships with friends and family members who can act as discreet sounding boards for informal financial advice is a great idea. Some annuity product scammers work on the often true assumption that older people are isolated, and that they will hence avoid telling anyone about their financial problems or decisions. By ensuring they stay plugged into their wider world, an older person can reduce the risk that they will become a victim.

And for those older people who are experiencing neurological problems and no longer have their full faculties, it may be up to friends and family to take significant legal steps to avoid their loved one falling victim to fraud. In these cases, family members may sometimes seek power of attorney to give them control over the person’s financial affairs and to act as a gatekeeper – especially if there is evidence that the older loved one has been vulnerable to scams or similar projects in the past.

The takeaway

  • Annuities, in general, are legitimate investment products and can come in a wide variety of formats – fixed income, escalating income, and more. They are often appealing because they can provide some level of security at a time when this might be scarce in an older person’s life. A person should only choose annuities if they are right for them, though – and they should never be chosen as a result of being pressured into doing so.
  • Those who fall victim to annuity payment scams tend to be older people, or those who are suffering from illnesses such as neurological diseases like dementia. Anyone who is vulnerable and who may have a lower level of financial literacy than normal can be a victim.
  • One of the main tactics employed by an annuity payment scammer is to prey on the victim’s sense of fear, perhaps around death or illness in later life. The person may be worried that their savings capital will run out if they don’t purchase the annuity, for example. Investment scams of this nature can also occur when a victim is pressured into signing up on the spot as part of a bonus or incentive scheme. And if it’s possible to cash out an existing annuity and swap it to a new provider, a scammer may try to encourage a victim to do this in order to unfairly pocket the commission.
  • There are many ways in which a potential victim can take steps to reduce the chances of an annuity fraud happening to them. First of all, they can ensure that they carry out due diligence on any annuity provider by heading over the website of the relevant regulator such as the Financial Conduct Authority. In addition, they can ensure that they get the support of friends and family on side to ensure that someone is always looking out for them and removing the element of isolation on which some annuity payment scammers prey. And it’s also important for older people to remind themselves that any offer which seems too good to be true will most likely be just that and is hence best avoided.