Beware Of Pension Advances

Do Not Accept A Pension Advance Until You Understand The Risks


If you have ever considered a pension advance, take warning. While a pension advance may seem like the perfect solution to getting yourself out of a difficult financial position, in the long run it can do much more harm than good. 

A pension advance, which may also assume other names such as “pension loans,” “pension income programs,” “mirrored pensions,” "factored structured settlements,” or “secondary-market annuities,” occurs when a business gives a retiree a lump-sum payment in exchange for the right to some or all of that retiree’s monthly pension payments for a period of time.

Repayment of the advance is expressed as a set number of monthly payments from pension income, which effectively hides any fees and charges associated with it.  Fees and interest rates usually are not disclosed even in the pension advance contract.  

I believe that pensions should be treated as a sacred income stream, untouchable like Social Security.  A pension advance is one of the oldest financial tricks in the book and people are getting snickered out of their hard-earned money.  These “pull forward pensions" should be avoided at all costs. 

Warnings from the CFPB, FINRA & SEC

The dangers of pension advances are so grave that agencies who are responsible for protecting consumers and investors have issued warnings against this practice.  The Consumer Financial Protection Bureau (CFPB) says that pension advances can take a significant bite out of your retirement income when you have to pay back the advance plus its’ high fees and interest.

  The CFPB also notes that government retirees are prime targets for pension advance businesses.  In a warning against pension advances, the Bureau offers these three tips to protect your pension from being exploited by avoiding these pension advance traps:

  • High fees and interest.  Before you sign on the dotted line, make sure you understand the fees and interest rate associated with the advance.
  • Don’t give away control of your benefits.  Some pension advance companies arrange for your monthly pension payments to be deposited in a newly created bank account so they can withdraw payments, interest and fees directly from the account.
  • Don’t agree to buy life insurance that you don’t want or need.  Pension advance companies can sometimes require you to buy life insurance naming them as the beneficiary.  According to the CFPB, “if you sign up for life insurance with the pension advance company as your beneficiary, you could end up footing the bill, whether you know it or not.”

In May 2013, the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC) jointly issued an investor alert, Pension or Settlement Income Streams—What You Need to Know Before Buying or Selling Them. The alert discusses the risks for anyone considering selling their rights to pension income for a lump-sum payment, or anyone considering investing in someone else’s pension income. The Federal Trade Commission also has issued a bulletin on pension advances, Pension Advances: Not So Fast.

If you are offered a pension advance, be sure that you know all the financial risks that are associated with this practice.

  If you have additional questions, please seek guidance from a financial professional who can best advise you on how to keep your money safe. 

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Disclosure:  This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make.

Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. 

Wes Moss is the Chief Investment Strategist at the financial planning firms Capital Investment Advisors and Wela. He is also the host of the Money Matters radio show on WSB Radio.  In 2014, Moss was named one of America’s top 1,200 financial advisors by Barron’s Magazine. He is the author of several books including his most recent, You Can Retire Sooner Than You Think  - The 5 Money Secrets of the Happiest Retirees, which has been one of Amazon’s best-selling retirement books in 2014.