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Questions to ask before considering a 'pension advance'

Signing away your pension for a lump sum payment may be an expensive proposition

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Retirees who are trying to make ends meet may be tempted to sign up with a company that promises to turn pension payments into lump-sum cash.

Instead of getting a check every month, the retiree essentially agrees to sell his or her right to the pension to the company in return for the single big payment.

Officials in Pennsylvania, which has one of the largest populations of seniors in the country, is warning consumers to get all the facts before considering such a proposal.

'Thinly-disguised loans'

The Pennsylvania Department of Banking and Securities calls these pension advances nothing more than “thinly-disguised loans with no contractual or financial relationship with the consumer's pension or pension plan.”

It points out that the company making the advance may collect a lot more in terms of pension payments than what it pays the retiree.

“In almost all cases, the payments made by the consumer are more than a lender can legally charge on a loan to a Pennsylvania resident,” the department said in a press release.

It intervened in May to stop one company from operating a pension advance business, citing it for not being licensed.

FTC's advice

The Federal Trade Commission (FTC) notes that pension advances aren't cheap. They can carry fees that can push the effective annual percentage rate (APR), the cost of credit on a yearly basis, over 100%. In many cases, it says these companies also require consumers to purchase life insurance, with the pension company as the beneficiary.

There are several questions you should ask before considering a pension advance proposal.

  • Are you eligible? It might be against the law to sign over your pension to someone else. Check with your pension administrator.
  • How much does it cost? Do the math, measuring the amount you get against the number of payments the company will collect. The difference is the interest and fees the company is collecting.
  • Do you have to buy life insurance? If so, the premiums will be an extra expense.
  • What are the tax implications? A lump sum payment could push you into a higher tax bracket.
  • Can you cancel the deal if you change your mind? Maybe not, some of these agreements are binding.

The FTC says there are better alternatives for seniors who need extra cash. A personal loan from your bank or credit union might actually be cheaper.

If money problems are persistent, consider working with a non-profit credit counselor to find ways to reduce expenses.

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