Today, traditional pension benefits are gold for retirees who receive them, as they’re fast disappearing from the workplace.
But even with a pension, some retirees still struggle financially and sometimes have a need for extra cash because of unexpected bills or emergencies. Unfortunately, that’s when they can fall prey to companies seeking to take advantage of their desperation through a “pension advance.”
Also known as a pension sale, loan or buyout, a pension advance provides you with a lump sum to meet your cash-flow needs. In return, you’re required to sign over all or some of your monthly pension checks for a period of time — often five to 10 years.
However, the pension payments you sign over typically exceed the amount of the lump sum received, affecting your income far down the road. In addition, the pension advances often include fees that can significantly inflate the effective annual interest rate, according to the Federal Trade Commission.
“Unlike other types of cash advances or loans,” the FTC said, “taking out a pension advance means signing over money you need to live on.”
In addition to the FTC, the Consumer Financial Protection Bureau and the Government Accountability Office have raised concerns about the transactions.
“We’ve heard that some retirees with pensions who are facing financial challenges have responded to ads for cash advances on their pensions,” the CFPB said.
“Although pension advances may seem like a quick fix to your financial problems, they can eat into your retirement income when you start paying back the advance plus interest and fees.”
According to the CFPB, pension advance companies often target government retirees with pensions but can also market toward retirees with private pensions.
The GAO, the nonpartisan investigative arm of Congress, looked into the practice last year because of “recent concerns about companies attempting to take advantage of retirees using pension advances.”
The GAO identified at least 38 companies that offered individuals advances in exchange for receiving part or all of their pension payments.
“All of the companies operated primarily as Web-based companies, and some targeted financially vulnerable consumers with poor or bad credit nationwide,” the GAO said in its report.
During its undercover investigation, the GAO received offers from six out of 19 pension advance companies.
“These offers did not compare favorably with other financial products or offerings, such as loans and lump-sum options through pension plans,” the agency said.
“For example, the effective interest rates on pension advances offered to GAO during its undercover investigation typically ranged from approximately 27 percent to 46 percent, which were at times close to two to three times higher than the legal limits set by the related states on the interest rates assessed for various types of personal credit.”
Attempts to reach several pension advance companies for comment were unsuccessful. However, websites such as Buy-My-Annuity.com and Sell-Your-Future-Payments.com continue to tout the benefits of a pension advance.
“Most people would rather have a few dollars today, rather than a few cents paid to them over an extended period of time,” says Buy-My-Annuity.com.
Sell-Your-Future-Payments.com makes clear the transaction is not a loan and acknowledges that the lump sum you receive is less than the amount of the payments you make.
“Current dollars are more valuable than future dollars,” it says. “Just like lottery winnings, a winner can collect all of his money over twenty years, or approximately 50 percent of the total amount at the time of winning.”
Before taking a pension advance, here are questions federal regulators say you should ask:
Are you eligible? Depending on the type of pension you have, you may not be able to sign it over. Check with your pension administrator for details. Federal law prohibits assignment of federal pension benefits.
What are the costs? Be aware of all costs and fees. Ask for the annual percentage rate, which is based on several factors including the amount you borrow, the interest rate and credit costs you’re being charged, and the length of your contract. And get it in writing.
Do you have to buy life insurance? Some pension advance companies may require you to buy a life insurance policy naming them as beneficiary. If you die before all the payments are made, funds will be paid out from the life insurance policy to cover any remaining balance.
“Don’t buy life insurance that you don’t want or need,” said the CFPB. “If you sign up for life insurance with the pension advance company as your beneficiary, you could end up footing the bill, whether you know it or not.”
Can you cancel the transaction? Some pension advance companies might not let you cancel once you’ve completed the deal. Make sure you ask about the cancellation policy before you sign the contract so you know what you’re getting into.
Are there any complaints about the company? Check with the Better Business Bureau and the Texas attorney general’s office to see if any complaints have been filed about the company.
“Just keep in mind that a lack of complaints doesn’t mean the business is on the up-and-up,” the FTC said. “You may want to do an Internet search with the name of the company and words like ‘review,’ ‘scam,’ or ‘complaint.’”
Don’t sign over control of your benefits: “Companies sometimes arrange for monthly payments to be automatically deposited in a newly created bank account so the company can withdraw payments, fees and interest charges from the account,” said the CFPB. “This leaves you with little control.”
If you’re like many retirees, your pension benefits are your key source of income, along with Social Security, allowing you to maintain a decent standard of living. Guard them zealously.
Pamela Yip is a personal finance columnist for the Dallas Morning News.