It sounds like a win-win: Retirees looking for fast cash sell their future monthly pension payments, and individual investors who are buying them get steady income. But retirees on both sides of such transactions are getting hurt, regulators and consumer advocates say.
State and federal securities regulators, along with the
In a typical transaction, the pension-advance company then sells that monthly income stream to an individual investor--often a retiree who's buying through a financial adviser or insurance agent. The deals unite a pensioner who needs cash with a retiree who needs steady income--but in the middle, there's "somebody taking advantage of both," says
For pension recipients, these transactions can be a costly way of raising cash. The effective interest rate on the deals often ranges from 27% to 46%, according to the GAO. In some cases, the agreements also require the purchase of life insurance naming the pension-advance company as beneficiary.
For investors, these seemingly safe income investments are fraught with risk. One major pitfall: Some pension-advance transactions have been invalidated in court because of federal laws prohibiting the "assignment," or transfer, of certain types of pensions.
Despite the regulatory scrutiny, Web sites such as Buy-My-Annuity.com and USPensionFunding.com continue to tout the benefits of pension-advance transactions. During a long period of low interest rates, the deals can attract income-hungry investors with advertised yields that often range from 5.75% to 7.75%, according to the
The GAO recently examined 99 lump-sum offers from six pension-advance companies. Almost all of the offers amounted to roughly half of the minimum lump sum that the pensioner could be offered by a private-sector defined-benefit pension plan under federal rules.
GAO also calculated interest rates for the lump-sum offers and found that most were well above the legal maximum, or "usury" rates, that some states have set for consumer credit.
Although pension advances resemble loans, companies offering them often insist that they are not loans--and thus sidestep state and federal lending regulations. The federal Truth in Lending Act, for example, requires that lenders disclose to consumers an effective interest rate for each transaction, but most of the pension-advance companies examined by the GAO did not disclose this information. Absent such disclosure, consumers considering pension-advance offers often don't realize that they could borrow the same amount of money at a far lower interest rate, says
Even when the terms are clearly unfavorable, some retirees feel a pension advance is the only way to stay afloat. Pinched by the financial crisis in 2008, a retired
Before taking a pension advance, consider alternatives such as a bank or credit union loan, the FTC suggests. Your pension plan may also offer a lump sum in lieu of monthly payments. If you're struggling to pay bills, consider contacting a nonprofit consumer credit counseling agency, which can help you work out a debt repayment plan. Find an agency at the
FROM THE INVESTOR'S PERSPECTIVE
Advisers selling pension- or disability-based income investments tout their predictable income and generous yields. Yet these investments often stand on shaky legal ground, and the income stream can quickly run dry. Investors are typically buying an individual's pension stream. In some cases pensioners simply stop forwarding the payments.
The sale of the investment was unlawful due to federal laws prohibiting the assignment of U.S. government pension and disability benefits, and VFG knew, or should have known, that investors would be unable to enforce the contracts, Vicari alleged in his complaint. In its answer to the complaint, VFG denied the charge. VFG did not respond to a request for further comment.
While Vicari's case is ongoing, courts in some other pension-advance cases have found that the agreements are illegal and can't be enforced. In addition to military pensions, most other federal government pensions, certain state government pensions and large private pensions covered by the federal ERISA law are subject to anti-assignment rules, Rossman says.
What's more, commissions on these pension-based investments can amount to 7% or more, according to the