Pension advances — essentially loans against a private, government or military pension — are an expensive and financially risky way for someone living in retirement to get cash, according to a new study by the Government Accountability Office, or GAO.
GAO representatives posed as retirees and contacted 38 companies that offered individuals lump-sum payments or “advances” in exchange for receiving part or all of people’s pensions. The map at right shows the states in which they’re located. The interest rates from several companies ranged from 27 percent to 46 percent — two or three times the legal usury limit set by the states in which the companies were offering the loans. Two were as high as 90 percent. Most of the companies didn’t fully disclose the interest rates — something credit card and other lending companies are required to do.
If you have a pension, you generally qualify for one of these loans. “The amount of the loan depends on the amount of your pension and how many years you are likely to live, but $50,000 isn’t unusual,” says Stephen Lord, managing director of forensic audits for the GAO. “For a lot of people it sounds like a good deal and they are attracted to it because they are in financial distress.”
The trouble is that pensions are generally worth a lot more than the amount of the loans. In comparison to the lump-sum options that companies can offer under rules of the federal Employee Retirement Income Security Act, or ERISA, the GAO found pension loans were only 46 percent to 55 percent of the amount. This means retirees were getting only about half of what ERISA would have required.
Resist the temptation
The GAO says that the typical sales targets for these pensions are people whose retirement planning has gone awry. They need cash, but they can’t borrow from other sources, often because their credit scores are so low. A GAO investigator who made calls posing as a potential borrower was told that the average pension advance customer had a credit score of between 400 and 500 points — at least 100 points below the score most legitimate lenders consider a minimum. “Typically it’s because they are struggling and they need this money,” a company rep told the GAO investigator, according to the report.
The pension advance company will insist that a borrower set up a joint account. Once the person is approved and the loan amount is paid, the lender will begin taking all or part of the pension directly as soon as it is deposited. The lender also will likely insist that the borrower purchase a life insurance policy and make the lender the beneficiary — in case the borrower dies before the loan is paid off.
If you are short on cash and are offered one of these loans, think hard before you commit. Lord says retirees rarely understand the consequences of these loans until they find themselves tangled in them. Many of the lenders are invisibly intertwined. “If you have a complaint, you’re never sure which company you’re dealing with,” he says.
Other, better options, for emergency cash might include a government-guaranteed reverse mortgage or other available government assistance. Benefits.gov offers a comprehensive list. Another helpful source is BenefitsCheckup.org, operated by the National Council on Aging.