If you're considering taking a loan that offers to convert tomorrow's pension into cash today, run the other direction.
The federal Office of Investor Education and Advocacy has issued warnings against a growing number of "factoring" companies that buy and sell pension rights and settlements. It said in a recent bulletin that government employees and members of the military living in retirement are among those being approached most often with offers of loans and outright sales of pension rights for sums that are significantly less than the accumulated periodic payments would otherwise be worth.
Why would people ever consider selling their pensions? Bad retirement planning? Desperation? Greed? One of many factoring companies, Pension Funding LLC, advertises "Eliminate Debt. Improve Your Home. Launch a Business. Take a Dream Vacation."
Sounds good until you stop long enough to consider the details.
The New York Times calculated that the interest rates on these pension loans range from 27 percent to 106 percent.
If you're offered one of these deals and you're tempted to take it, here are three things to consider:
What is the total cost? Find out what the discount rate is. That's the amount that the factoring company is using to arrive at the value of your future pension. The higher the discount rate, the less they are valuing your pension in today's dollars. That shrinks the lump sum you'll be offered. You should also ask about commissions, fees and other administrative costs. When you add all this together, does it still look like a deal worth taking?
Will you be required to buy life insurance? Many factoring companies require the holders of the pensions they acquire to buy life insurance and make the company the sole beneficiary. Buying insurance will reduce your take still further.
What are the tax consequences? If they give you a lump sum, you'll have to pay income taxes on it and that will eat up a significant portion of anything you get.
If you're tempted to take one of these lousy deals, first get a second opinion from a knowledgeable and trustworthy resource.