Have you seen ads for companies that will pay you cash up front if you have a pension account? They’re similar to ads aimed at people who had personal injury claims that resulted in structured settlements payable over a long period of time.
The idea sounds pretty good for people who have a reliable stream of income but need extra cash now.
However, as detailed in a recent article in the New York Times, these pension loans can be very bad for the recipients. Here are the opening paragraphs of the article:
To retirees, the offers can sound like the answer to every money worry: convert tomorrow’s pension checks into today’s hard cash.
But these offers, known as pension advances, are having devastating financial consequences for a growing number of older Americans, threatening their retirement savings and plunging them further into debt. The advances, federal and state authorities say, are not advances at all, but carefully disguised loans that require borrowers to sign over all or part of their monthly pension checks. They carry interest rates that are often many times higher than those on credit cards.
In lean economic times, people with public pensions — military veterans, teachers, firefighters, police officers and others — are being courted particularly aggressively by pension-advance companies, which operate largely outside of state and federal banking regulations, but are now drawing scrutiny from Congress and the Consumer Financial Protection Bureau.
The pitches come mostly via the Web or ads in local circulars.
“Convert your pension into CASH,” LumpSum Pension Advance, of Irvine, Calif., says on its Web site. “Banks are hiding,” says Pension Funding L.L.C., of Huntington Beach, Calif., on its Web site, signaling the paucity of credit. “But you do have your pension benefits.”
Another ad on that Web site is directed at military veterans: “You’ve put your life on the line for Americans to protect our way of life. You deserve to do something important for yourself.”
A review by The New York Times of more than two dozen contracts for pension-based loans found that after factoring in various fees, the effective interest rates ranged from 27 percent to 106 percent — information not disclosed in the ads or in the contracts themselves. Furthermore, to qualify for one of the loans, borrowers are sometimes required to take out a life insurance policy that names the lender as the sole beneficiary.
LumpSum Pension Advance and Pension Funding did not return calls and e-mails for comment.