Aug. 21, 2014 at 11:22 AM ET
A pension, for those lucky enough to have one, offers a guaranteed check every month for the rest of your life upon retirement. But a number of companies are now offering an alternative: a pension advance, typically made in one lump sum payment.
Their pitch, 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.
“It’s just a lousy deal,” said John Wasik, a personal finance columnist and author of "Keynes’ Way to Wealth." “I wouldn’t recommend this for anyone under any circumstances because the fees are so high.”
Another costly gotcha: You may be required to buy a life insurance policy that names the pension advance company as beneficiary, to protect them if you die.
Mark Corbett runs the website Buy Your Pension, which helps facilitate pension sales. He told TODAY that a pension advance is not for everyone, but he believes it can be beneficial for some people.
“You should not sell your pension unless it saves you money,” he said. “For example, you are using it to pay off bills.”
Four years ago, Corbett got an advance on his private pension — selling a $237,000 nest egg for $89,000 — to pay off his mounting bills. He called it “a godsend” that reduced his stress and probably added years to his life.
Hold on, not so fast
A number of consumer protection agencies, however, including the Federal Trade Commission (FTC), Consumer Financial Protection Bureau (CFPB) and the Financial Industry Regulatory Authority (FINRA) recently issued warnings about the downsides of pension advances.
“There are serious financial consequences down the road for taking the money in a lump sum now,” said Gerri Walsh, FINRA’s senior vice president of investor education. “You are getting less money than if you waited and got those monthly pension payments.”
Unlike a traditional loan, you can’t get out of the deal early. If you signed up for a six-year payout, the company gets your pension for a full six years.
“A pension advance is unlike any other type of financing, because you’re required to sign over part of your future income stream,” said Leah Frazier, an attorney for the FTC. “You could find yourself in a situation down the road where you need money for your basic expenses, but you don’t have it because you took it as an advance.”
And remember: Getting a lump sum pension payment is likely to have some serious tax implications.
“It could push you into a higher tax bracket,” said Lisa Greene-Lewis, lead CPA at TurboTax. “I could see people doing this and getting shocked by the additional taxes they now have to pay.”
Banned in Missouri
Companies are no longer allowed to sell pension advances to public employees in Missouri. Last month, it became the first and only state to ban them.
“Not only did we protect our police officers, firefighters, teachers and veterans, but we sent a message that we don’t want these predatory businesses in Missouri,” said state Treasurer Clint Zweifel. He calls a pension advance “a payday loan” without a cap on the interest rate.
Federal regulators have warned about these companies, but they haven’t done much to regulate the industry. The Government Accountability Office (GAO) recently recommended that the Consumer Financial Protection Bureau and the Federal Trade Commission study the marketplace and “exercise oversight or enforcement” as appropriate.
GAO investigators who did undercover shopping at 38 web-based pension advance companies found a range of “questionable business practices.” In a report released last month, GAO concluded that the offers it received “did not compare favorably with other financial products or offerings, such as loans and lump-sum options through pension plans.”
Are there other options?
Financial experts advise people who need cash in a hurry to try some other way to get the money first. Talk to your pension administrator to find out if you can get an advance. Maybe you could borrow from a family member or take out a home equity loan. You’d probably be better off in the long-run, they say.
If you find yourself tempted to use a pension advance service, stop and talk to your financial adviser. You need to find the true costs and overall implications of such a transaction. Experts say the effective annual percentage rate for these loans can be 100 percent or more.
“A pension advance is a very expensive way to go,” said Doug Shadel with AARP’s Fraud Watch Network. “Remember, most of these companies are interested in making money, not your long-term financial well-being.”
A recent AARP bulletin warns people to Beware of the Pension Predators.