Pension Advances: Not So Fast
“Convert tomorrow’s pension checks into hard cash today.”
If you’re looking for a way to generate cash to make ends meet, a pitch like this may pique your interest. But before you sign on the dotted line, it’s important to know what you’re getting yourself into.
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.
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.
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.
- Are there complaints about the company? 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. Look through several pages of search results. And check out articles about the company in newspapers, magazines, or online, as well.
Before you decide to take an advance against your pension, weigh your options.
- Consider a small loan from your credit union or a small loan company. Some banks may offer short-term loans for small amounts at competitive rates. A cash advance on a credit card also may be possible, but it may have a higher interest rate than other sources of funds: find out the terms before you decide. In any case, shop first and compare all available offers.
- Shop for the offer with the lowest cost. Compare the APR and the finance charges, which includes loan fees, interest and other costs.
- If you’re considering a pension advance because you’re having trouble paying your bills, contact your creditors or loan servicer as quickly as possible and ask for more time. Many may be willing to work with consumers whom they believe are acting in good faith. They may offer an extension on your bills; make sure to find out what the charges would be for that service — a late charge, an additional finance charge, or a higher interest rate.
- Contact your local, non-profit consumer credit counseling service if you need help working out a debt repayment plan with creditors or developing a budget. These groups offer credit guidance to consumers in every state for no or low cost.
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); TTY: 1-866-653-4261. Watch How to File a Complaint to learn more. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.
To learn more about personal finance issues, visit Money & Credit. To learn more about pension advances, read Pension or Settlement Income Streams—What You Need to Know Before Buying or Selling Them, from the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).