Pension risks, third-party frauds and tax liability after drawdown

Liberalisation of pension rules has given savers greater freedom over their financial affairs than ever before, but alongside increased autonomy has come concern about a heightened risk of fraudulent activity.

Current accounts remain the single most targeted financial products by fraudsters. According to research from Experian’s Interim Fraud Report 2015, 151 in every 10,000 applications is now deemed fraudulent, compared to just 50 in every 10,000 pension applications; but the targets and types of fraud committed are changing.

Fund risk

Consumers in the UK are keen adopters of new technology and as a result pension providers are faced with a pressing need to make services available through digital channels, but while providers understand the need to provide access and functionality through mobiles and desktops, they fear the possible reputational risk of erroneous payments to fraudsters.

Fraud threats against an institution are real, but pension providers are in a position to mitigate many risks by learning from the digitisation of the banking sector. By bringing the necessary expertise in-house, and understanding what constitutes successful anti-fraud measures, pension providers can quickly learn to be secure and cover themselves against a risk of exposure.

The bigger risk, potentially, could be to the consumer.

Cash rich

Compared to banking, false pension applications are relatively low, but that doesn’t mean the whole of the pensions system isn’t without risk. The growing incidence of ID theft means the target of fraud is increasingly third-parties, rather than the institutions themselves.

An independent research project of over 50s commissioned by Experian, in September 2015, found that 10% intend to take their cash in one go when they reach pensionable age – and 42% of these people would choose to reinvest that money. With so many pensioners now likely to have access to large pots of money following a drawdown, they are viewed as being increasingly vulnerable to scams and criminal schemes. In fact, 38% of over 50s are concerned about the risk of fraud in relation to their pension.


Under the new pensions regime, instead of automatically buying an annuity, savers are free to drawdown 25% of their pension pot without paying tax, but after that any money taken out is taxable. So anyone drawing down their entire fund in one go is likely to be liable for higher rate or an additional rate tax, at 40% and 45% respectively.

In the event of a fraud against that person, the liability for tax on the amount drawn down won’t be waived by the authorities, leaving the defrauded individual with concerns on two fronts.


For providers concerned about reputational risk, it isn’t just the threat of fraudsters stealing money directly from their organisations which could damage how they are perceived.

Providers need to engage with customers to explain how the new rules affect them as individuals. They also need to educate the consumer around likely frauds, ways to reduce the risk of ID theft, and how to stay safe when using new digital channels to interact with their pension funds.

A provider that not only takes adequate measures to ensure their systems are safe, but that also helps their customers to stay safe, is likely to reduce overall fraud and be viewed in a positive light.