Seniors who receive a pension from, say, the military or a public fund should be wary of pension advances. Federal Trade Commission in July 2014 warned consumers about pension advances, which also are known as pension sales, loans or buyouts.
Pension advances promise a lump-sum payout in return for some or all of a retiree’s monthly pension checks. Pension Rights Center (PRC), which is a consumer advocacy group, calls pension advances loans that masquerade as a lump-sum payment to avoid state and federal regulation. Consumer Financial Protection Bureau says veterans have complained that effective interest rates are as high as 106 percent. Pension advances also often require retirees to buy a life-insurance policy, with the pension-advance company as the beneficiary, to ensure that the repayments continue, according to FTC.
“We think it’s very predatory,” says Nancy Hwa of PRC. “It’s not that much different from payday-loan schemes.” Because repayment is expressed as a set number of monthly payments from pension income, the real costs of pension advances can be hidden, PRC says.
In July 2014, Missouri became the first state to prohibit pension advances that target the pensions that are earned by public employees, which include teachers, firefighters and police officers. The same month, Vermont began to regulate pension advances as an act of lending, so they must follow all applicable laws. Other states are beginning to act, PRC says, but none has passed similar legislation.
“We really can’t think of any circumstances under which a person should take a pension advance,” Hwa says.