If you need money in a pinch you may be tempted to take an advance on your pension. However, if you’re not careful, you could get lured into a scam and lose the money you’ve worked so hard for.
Pension advances aren’t such a great deal. Once you begin repayment, you’ll likely face high fees and interest rates. Both the Consumer Financial Protection Bureau and the Federal Trade Commission have issued warnings to retirees, urging them to know what they’re getting into. Last year, the state of Missouri decided to ban pension advances for public employees. In addition, Vermont put pension advance regulations in place.
Here’s what you need to be aware of when it comes to pension advances.
1. You may not be eligible
The FTC says you should be aware that in some cases, you may not be able to sign your pension over to a pension advance company. It depends on the type of pension you have. Also know that in some cases, it might be illegal. Make sure to consult your pension administrator first.
2. You’ll be hit with high fees and interest rates
Since companies who offer pension advances say these advances are not loans, they often don’t follow the state disclosure rules or limits on interest rates that usually apply to loans, according to the Pension Rights Center. Consequently, interest rates could be anywhere from 27% to 46%, according to research conducted by the Government Accountability Office. Many consumers don’t know the full cost until it’s time to pay up.
3. Some details might not be in writing
Some of the details might not be made available in the brochures or in the contract, so it will be up to you to get everything written down. Ask about the APR and get all of the fees in writing. Ask about commission payments and if there is a life insurance requirement. Also make sure that you’re clear about the cancellation policy. Some companies do not allow participants to cancel once they’ve signed on the dotted line.
4. You might be asked to purchase life insurance
Once you sign up for a pension advance, you’ll be required to sign over all or part of your pension checks for a timeframe, usually lasting about five to 10 years. You will then receive a lump-sum payment (minus the transaction fees). In addition, some companies require that customers purchase a life insurance policy that names the company as the beneficiary. This is done to guarantee that payments will be made. Also be aware that your lump sum might be taxable, so it would be in your best interest to consult a tax professional if you decide to take an advance.
5. Financial scams abound
Unfortunately, seniors are often the targets of financial scams. The FTC recently refunded more than $2.4 million to investors who were tricked out of millions of dollars in a precious metals scheme. The FTC says many of the victims were senior citizens.
The fraudsters convinced investors to purchase precious metals on credit without making it clear there were huge risks and costs involved. What many of the investors didn’t know was that there was a possibility they would have to pay additional fees or run the risk of losing their investments.
If you’ve been caught in the tangled web of an investment or pension advance scheme, you can file a complaint through the Federal Trade Commission’s Complaint Assistant. You can also call 1-877-382-4357. Your state Attorney General’s office can also be of assistance.
If you have a question about pension advances, you may be able to get assistance from the U.S. Administration’s Pension Counseling and Information Program, which provides free legal counseling to those having difficulty with a pension, retirement, or profit sharing plan (currently, services are only available in 30 states).