3 Dangers of Borrowing Against Your Pension

For consumers who are entitled to a steady stream of future payments, like a pension or structured settlement after a lawsuit, they may find themselves eligible for a lender offer on an “advance” lump-sum, upfront payment on that money. It’s kind of like taking out a loan on money you’ve already been promised. Since the “loan” payment is guaranteed by a strong entity like a pension fund, you’d think these products have low interest rates. However, when Congress’ General Accountability Office went undercover and got information about dozens of pension advance offers last year, it found interest rates ranged from 27% to 46%.

The problem with the upfront payments is this: The lump sum is far less than the total of the payments. On rare occasions, the upfront payment can make sense for someone in a bind, but generally, consumers need to be aware of the high costs. That’s why the Consumer Financial Protection Bureau has issued an advisory about “pension advance” traps, joining a chorus of other voices warning consumers about these kinds of expensive financial arrangements.

“Many retirees depend on a pension to cover day-to-day as well as occasional unexpected expenses, such as health emergencies or home repairs,” the CFPB said in its advisory. “We’ve heard that some retirees with pensions who are facing financial challenges have responded to ads for cash advances on their pensions. Although pension advances may seem like a ‘quick fix’ to your financial problems, they can eat into your retirement income when you start paying back the advance plus interest and fees.”

The arrangements are complex. Not only do pension recipients sign over five or 10 years of their benefits, they are often required to take out life insurance policies, to prevent payments from stopping in case of death.

Military veterans have also been targeted by pension advance offers, even though it’s generally illegal to assign federal benefits like pensions to a third party. That doesn’t stop companies from trying, however. California’s Department of Business Oversight issued a warning about pension advance loans to veterans in November.

“There are unscrupulous operators out there misleading investors and preying on vulnerable veterans who need cash,” said agency Commissioner Jan Lynn Owen. “We want veterans to know they cannot sign away their right to their pension or disability benefits.”

The alleged scams can also hurt investors, who supply the upfront cash and are often unaware the arrangements can be illegal, the California agency said.

The CFPB urges consumers who might consider such a loan to visit a credit counselor instead and search for other ways to handle whatever financial emergency is leading them to consider a pension advance.

It also advises consumers with pensions to:

1. Avoid loans with high fees and interest. Pension advance companies may not always advertise their fees and interest rates, but you will certainly feel them in your bottom line. Before you sign anything, learn what you are getting and how much you are giving up.

2. Don’t sign over control of your benefits. Companies sometimes arrange for monthly payments to be automatically deposited in a newly created bank account so the company can withdraw payments, fees and interest charges from the account. This leaves you with little control.

3. Don’t buy life insurance that you don’t want or need. Pension advance companies sometimes require consumers to sign up for life insurance with the company as the consumer’s beneficiary. 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.

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