Tags: Regulators | Scrutinize | Pension Advance

Regulators Scrutinize Legality, Ethics of Pension Advances

By    |   Sunday, 26 May 2013 09:41 AM

State and federal regulators are eyeballing pension-advance firms that provide cash today in exchange for a slice of peoples' pensions tomorrow.

According to CNN Money, authorities are concerned about the web of high costs and debt that seniors can get entangled in and the risk to investors who are funding these schemes.

In essence, a pension advance provides an upfront lump sum of cash to an individual who agrees to give up a portion of this or her monthly pension payments. CNN Money says sometimes the deal involves forfeiting all of one's monthly compensation.

The repayment arrangements usually last for five to ten years.

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Firms offering these services tend to market them to those with military, government or corporate pensions, CNN Money says.

According to data from the National Consumer Law Center, the effective interest rate on these advances can range from 27 percent to 106 percent.

In addition to the monthly payments, individuals who get advances also tend to pay costs such as origination fees. To help ensure repayment, retirees can also be required to obtain life insurances policies in which they list either the pension advance firms or the investors as the beneficiaries.

This is an additional cost that can be hefty for older people with health issues and who may also have other life insurance policies, Bloomberg warns.

The individual investors named as beneficiaries are commonly the sources of cash for the upfront payments. CNN Money says these investors are often retirees themselves. They are drawn to what they believe to be no-risk or low risk opportunities that can offer an annual return of 7 percent or more.

In addition to being subject to commissions, which are reportedly around 7 percent or higher, and potentially facing difficulty in liquidating these investments, individual investors actually do face a significant risk of not getting their money back.

Authorities scrutinizing these schemes include FINRA, the SEC and regulators in New York. If this practice is deemed illegal, pensioners who have received lump sums may not have to repay. According to CNN Money, investors have already gotten burned after Arkansas regulators issued a cease-and-desist order for a pension advance firm based in that state.

Another drawback that Bloomberg outlines involves taxes. Being in a lower tax bracket is often one of the benefits enjoyed by those who exit the workforce. Receiving a lump sum of cash can wipe away those perks, boosting the costs even further.

New York regulator Benjamin Lawsky told CNN Money pension advances are “payday loans in sheep's clothing."

This is an idea that you should run, not walk away from, Bloomberg warns.

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State and federal regulators are eyeballing pension-advance firms that provide cashtoday in exchange for a slice of peoples' pensions tomorrow.
Regulators,Scrutinize,Pension Advance
Sunday, 26 May 2013 09:41 AM
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