The retirement-planning landscape has changed dramatically over the past few decades, switching away from traditional pensions and more toward what Interest.com’s Mike Sante calls the “Do-It-Yourself” model (including 401ks and IRAs).
However, many of you still are eligible for a pension (however large or small) to help out in your retirement years. For those of you in that boat, be warned of a new scheme that’s out there: “pension advances.”
These are nothing but trouble.
In a nutshell, pension advance products are set up to provide you with an up-front cash payment — in essence, it’s a loan — in exchange for all or a portion of your monthly pension check for several years, which becomes the “payment” to satisfy the debt.
The pension advance product is being aggressively marketed to individuals with military, government or corporate pensions. Military and government pensioners are particularly attractive, as their pension source is fairly secure, lessening the risk of non-payment.
The tricky part here is that these “loans” don’t fall under any banking jurisdictions and thus are not regulated. At least they’re not thought to. The SEC — along with the Financial Industry Regulatory Authority, bank regulators in New York and a U.S. Senate committee — are all looking into the practice.
But for now, with no regulations in place, these loans are total poison. According to data from the National Consumer Law Center, the effective interest rate on pension advances can run from 27% to over 100%. How? Add-on costs such as origination fees, commissions to brokers who sell the products, and possible premiums for a life insurance policy naming the pension advance firm the beneficiary in the event of the borrower’s death add layers of cost to what might already be an extremely high interest rate.
Another disconcerting part of this scheme is the source of funds: Other individual investors — according to CNNMoney, many of these are retirees — who either act alone or pool resources to raise the upfront cash (in return for the steady return of the pension checks.) However, these investors face risk, too … in the form of liquidation if the loan pool dries up because of loan default.
It’s pretty clear you want to stay away from this practice. So, here’s what to do if anybody does contact you about a pension advance:
- Don’t Disclose Pension Information: Anyone who calls unsolicited to ask about your pension can’t possibly have your best interests at heart. If you receive such a call, simply hang up. By all means, do not provide any information about your pension status.
- Contact a Government Authority: It might sound rash, but with the SEC, U.S. banking regulators and Senate investigating the practice, a quick call to your state banking commissioner’s office is worth it — particularly if you have received multiple calls. If you’re being hassled, let someone know.
- Discuss Your Situation With a Lawyer: If you’re already involved in one of these products, it might make sense to contact an attorney, particularly if you find yourself falling behind on the payments. Some courts have ruled the advances — particularly in the case of military pensions — are illegal and unenforceable.
It’s your hard-earned money at stake here. Protect yourself.
Marc Bastow is an Assistant Editor at InvestorPlace.com.