Before You Take a Pension Advance, Consider the Consequences

Injured Piggy Bank WIth Crutches

You’ve heard of payday advances. But pension advances?

Believe it or not, businesses are popping up that allow retirees to do just that: “sell” a portion (or all) of their future retirement income in exchange for a lump sum of cash today.

The owners of these businesses admit that their service isn’t for everyone. But if you need to pay bills now, they say, then why not sell a portion of your pension for cash?

The pitch, described by Today:

Aimed at military and government retirees with generous pension benefits and those with bad credit, is mighty appealing: cash now to pay today’s bills.

Of course, to get tomorrow’s money today, you have to sign over your future pension payments for a specified number of years.

Pension advances are perfectly legal in all states except one: Missouri.

But now the tactic is gaining media attention. Recently, leading national newspaper the New York Times took a look at pension advances. Typically, the advances appeal to people who are low on money and straddled with debt:

After he retired from the Navy in 1993, Dr. Kroot and his wife encountered serious cash flow problems because of unexpected tax bills, damage to their home from a broken water pump and credit card debt. All told, they owed about $96,000.

Responding to an ad in a military magazine, Dr. Kroot entered into a contract with a company called Retired Military Financial Services Inc. that gave him a $91,566 lump sum in exchange for an advance on his Navy pension.

The contract called for him to sign over to the company 95 monthly pension payments of $2,457 each.

In addition, the company, based in Huntington Beach, Calif., required Dr. Kroot to buy a $180,000 life insurance policy that listed it as a beneficiary in case he died before the money was repaid. The cost of the arrangement was the equivalent of an annual rate of 30.7 percent, far higher than the amount he would have paid at a credit union or bank.

Many major government agencies have denounced pension advances, according to the Times:

Agencies like the Consumer Financial Protection Bureau, Federal Trade Commission and Government Accountability Office have issued warnings about the services. The services also have been the topic of hearings in Congress. Yet no action has been taken on the federal level to regulate the practice.

An investigation this year by the G.A.O. found “questionable elements of pension advance transactions related to the disclosure of rates or fees, and certain unfavorable terms of agreements,” according to its report.

The Times made a list of things to consider when weighing whether to take a pension advance:

– Read the contract carefully and pay close attention to the fine print.

– Look for red flags, which can include a clause in the contract requiring you to buy an insurance policy and name the pension advance company as a beneficiary.

– Be aware that the contract language will lock you into the agreement for years, require you to deposit your payments in an account controlled by the company and also grant that company power of attorney. There are typically stiff financial penalties for trying to back out of the contract.

– Keep in mind that credit unions and banks are alternative sources of loans with much lower rates. If you have a whole-life insurance product, you can obtain a loan against the value of the policy. Internet-based peer-to-peer lending is another option.

– Consider counseling before obtaining any loan. Referrals are available through the National Foundation for Credit Counseling. Those with good credit and employment history can generally obtain lower finance rates than those with marginal or poor credit records.

– If you are considering a pension advance, have a certified financial planner, certified public accountant or lawyer review the contract. You will need to fully understand what legal traps may be buried in the agreement.

The Government Accountability Office report on pension advances can be read here.


Photo by  www.SeniorLiving.Org

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