Tags: pension | advance | loan | military

Pension Advances Nothing More than Payday Loans in Sheep's Clothing

By Michael Kling   |   Thursday, 23 May 2013 07:57 AM

Pension advances, also called pension sales or pension buyouts, are also being called "pay day loan in sheep's clothing" and are the latest scam to hit retirees.

In pension advances, pensioners get a lump sum cash payment and give up some or all of their monthly pension checks for a specified period of time.

These advances can sock retirees, including those with corporate, government or military pensions, with high interest rates and fees and put investors at risk. Effective interest rates can range from 27 to 106 percent, according to The New York Times.

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In addition, pensioners may be required to purchase a life insurance policy naming the pension advance firm or investor as the beneficiary.

Investors often provide the up-front cash, expecting returns of 7 percent or more, CNNMoney reports. They may think their returns are safe, but they can lose everything if the pensioner stops paying.

Although federal law prohibits assigning military veteran's retirement of disability pay to a third party, pension advance firms say their deals are legal because the pensioner keeps controls of the pension and makes payments out of their bank account.

However, some judges have not bought that argument and have ruled the advances illegal. That means pensioners can stop paying and investors lose their money.

Federal and state officials, including a U.S. Senate committee, are investigating the practice.

Benjamin Lawsky, head of New York's Department of Financial Services, called the advances "nothing more than payday loans in sheep's clothing."

The department sent subpoenas to 10 pension advance firms, seeking to find if the firms broke state usury laws and federal law prohibiting assigning military pensions to third parties.

Pension advance firms say their products are not subject to usury laws because they are advances, not loans. They instruct veterans to set up separate bank accounts to receive pensions and make payments in an attempt to avoid the federal restrictions on military pensions, The Times reports.

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