The Heavy Cost of Pension Advances

Pension advances come at a very steep price

If you’re retired and trying to make ends meet, here’s a pitch that might catch your interest: “Convert tomorrow’s pension checks into hard cash today.”

Pension advances, also known as pension sales, loans, or buyouts, require you to sign over all or some of your monthly pension checks for a period of time — typically five to 10 years. In return, you get a lump sum payment, less than the pension payments you sign over. So, unlike other types of cash advances or loans, taking out a pension advance means signing over money you need to live on.

Sound tempting? Think again. Pension advances, also advertised as pension sales, loans, or buyouts, can come at a very steep price.

Pension advances aren’t cheap: The transactions often include fees that can push the effective annual percentage rate (APR), the cost of credit on a yearly basis, over 100%. In addition, retirees often are required to buy a life insurance policy — with the pension advance company named as the beneficiary — to insure that the repayments continue.

Most pension advances require you to sign over all or some of your monthly pension checks for five to 10 years. The lump sum payment you get in return is less than the pension payments you sign over, so you’re signing away money you need to live on.

And pension advances often require retirees to buy a life insurance policy – with the pension advance company as the beneficiary – to insure that the repayments continue.

If you’re considering a pension advance loan, get answers to the following questions:

• Are you eligible? Depending on the type of pension you have, you may not be able to sign it over. It might be against the law. Check with your pension administrator for details.
• What are the costs? Be aware of all costs and fees. Ask for the APR, which is based on several things, including the amount you borrow, the interest rate and credit costs you’re being charged, and the length of your contract. This information may not be disclosed in ads or contracts, so it’s important to ask and get it in writing. In addition, there may be other costs or fees, including commissions and life insurance.
• 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 you assigned have been received, funds will be paid out from the life insurance policy to cover any remaining balance.
• What are the tax implications? Getting a large lump sum can put you in a higher tax bracket. Consult with a tax advisor for information and advice.
• Can you cancel the transaction? Maybe not. Some pension advance companies might not let you cancel once you’ve completed the deal. Make sure you ask the company about its cancellation policy, before you sign the contract, so you know what you’re getting into.

 
You should always check for complaints about the company you’re considering. Your local consumer protection agency, state Attorney General’s Office, and the Better Business Bureau can tell you whether any complaints have been filed about a company. Just keep in mind that a lack of complaints doesn’t mean the business is on the up-and-up. You may want to do an internet search with the name of the company and words like review, scam, or complaint.

The FTC works to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. You can file a complaint with the FTC online or by phone. Call toll-free, 1-877-FTC-HELP (1-877-382-4357)