Five Common Investment Scams and How to Avoid Them

Investment scams are an unfortunate reality in this day and age, and pensioners are more likely to be targeted than any other demographic.

Scammers know that most sixty-somethings are sitting on a substantial nest egg, thanks to a lifetime of savings, investments and pension payments. And thanks to modern technology, today’s scammers are better equipped to find, contact and dupe unsuspecting investors.

Last year, the Financial Conduct Authority (FCA) received more than 8,000 reports of investment fraud from across the UK, but the regulator believes that this represents only a fraction of the total number.

It is never too early to start protecting yourself from potential scammers. So we’ve put together five of the most common investment scams, and what you can do to avoid them.

1. The Offshore Trader

This scam dates back to the 80s, and it is still going strong. It will usually involve an offshore trading firm offering unbelievable interest rates which are just that – unbelievable.

In order to deliver on their promises to investors, these firms will often invest recklessly, taking on enormous risk in the hopes of finding big returns.

In some scenarios, these firms may even operate like a Ponzi scheme, using the money from new clients to pay ‘dividends’ to existing investors. Unfortunately, this system can’t go on forever, and eventually the company will simply go bust, taking your capital with it.

Because these firms are located offshore, they are not subject to the strict regulatory controls of the UK’s FCA, so investors have little legal recourse if their money disappears.

2. The Pyramid Scheme

This is another good old-fashioned scam that is constantly being updated. Like the Ponzi scheme, the pyramid scheme relies on bringing in new customers to fund the so-called ‘dividends’ of its earlier investors.

Initially, you may be pleased with the strong returns that you receive, but eventually, your luck will run out.

Pyramid schemes will usually present themselves as legitimate business investments, and they will often be able to show proof of existing investors as a way of appearing more trustworthy.

However, when you drill down into the business model, you will find that the earnings are largely dependent on new investors signing up and paying joining fees or making large investments from the outset. This is an unsustainable business model, and should be avoided at all costs.

3. Cold Callers

Cold callers have become increasingly sophisticated in recent years, and it can be hard to work out whether you are dealing with a genuine person or a fraudster.

In many cases these cold callers will pose as your bank, warning you that there has been fraudulent activity on your account and asking you to verify your details. They will then use the information that you give them to access your bank account or use your credit and debit cards.

Never give your bank details to anyone over the phone. If you are receiving a genuine call from your bank, they will be happy to call you back after you have checked out their credentials and confirmed that the issue is genuine.

If you believe you have been targeted by a scammer – hang up immediately, block their number, and report them to your bank.

4. Land Banking

According to the FCA, Brits have lost hundreds of millions of pounds through this scheme, which promises investors a share of some land that will be used for development at a later date. However, it then turns out that the land is worthless.

If you are investing in land, always visit the plot before committing to an investment, then contact the local council and ask if the land has been approved for development. If not, avoid.

5. The Pension Review Scam

These have become more common since the laws changed to allow pensioners to withdraw their pension pot in a lump sum.

The scammers will usually call you out of the blue, offering you a free pension review. They will then recommend that you transfer all or most of your pension fund into a higher-risk scheme, promising that you will receive a substantial income from the returns.

Remember, nothing is ever free. The free review is designed to build up your trust in the scammer, but the end-game will always be to get access to your money.

What Can You do to Avoid Being Scammed?

As long as there is money in the world, there will always be people trying to scam you into handing it over. However, there are a few steps you can take to avoid being a victim.

  1. Report any suspicions

According to recent research from the FCA, only 63 per cent of over-55s would contact the authorities if they thought they had been approached by a scammer. By comparison, 84 per cent of over-55s would report a supermarket spillage.

There are new scams emerging every day, and by reporting your suspicions, you could be saving vulnerable people from becoming the next victim. If you have any reason to suspect that you have been targeted by a scammer, contact the FCA on 0800 111 6768.

  1. Bolster your online security

Online investment scams are becoming much more common, and the recent cyberattack on Experian proves that even big companies are not immune.

You can bolster your online security by downloading anti-virus software, and apps such as AdBlocker, which intercepts dodgy pop-ups. Some banks also have their own security apps, which they offer to customer free of charge.

If you use the Google Chrome browser, try to conduct any financial management within an ‘incognito’ window, which will prevent your passwords and search history from being saved on your laptop. This will ensure that your transactions cannot be tracked, in the event that your computer is stolen or hacked.

Finally, make sure that you have chosen strong passwords (i.e. more than 8 characters, featuring a mix of upper and lower caps, numbers, and symbols) for all your online accounts, and change them every six months or so.

If you are struggling to remember your various passwords, write them down and keep them in a safe, or use an online safe such as LastPass.

  1. Always do your due diligence

Due diligence is an essential part of any investment process. Before any money leaves your hands, you should be confident that it is going to be looked after by a trusted party. If you are approached with a new investment opportunity, make sure you ask for as much information as possible up front.

Get the name and contact details of anyone you speak to, and if you are dealing with a new company, ask if they are regulated by the FCA. Don’t agree to anything until you have verified these details independently (via a search on Companies House, or a call to the company’s head office).

Finally, if a deal sounds too good to be true, it probably is. If you have any doubts that you are dealing with a fraudster, contact the FCA or hire a financial advisor who can steer you in the right direction.

Kathryn Gaw

Kathryn Gaw is a financial journalist based in Belfast, Northern Ireland. She has been writing about personal finance and investment trends for more than a decade, and her work has been featured in the Financial Times, City A.M., the Press Association, and The Irish Independent, among many other publications.