It sounds like a win-win: Retirees looking for fast cash sell
their future monthly pension payments, and individual investors who
are buying them get steady income. But retirees on both sides of
such transactions are getting hurt, regulators and consumer
State and federal securities regulators, along with the Federal
Trade Commission and the U.S. Government Accountability Office, are
casting a critical eye on "pension advance" transactions. In these
deals, a consumer signs over to a pension-advance company a certain
number of future monthly pension or disability payments in exchange
for a lump sum, which can be significantly less than the value of
the future payments.
In a typical transaction, the pension-advance company then sells
that monthly income stream to an individual investor--often a
retiree who's buying through a financial adviser or insurance
agent. The deals unite a pensioner who needs cash with a retiree
who needs steady income--but in the middle, there's "somebody
taking advantage of both," says Christopher Vernon, a Naples, Fla.,
lawyer who has examined the deals.
For pension recipients, these transactions can be a costly way
of raising cash. The effective interest rate on the deals often
ranges from 27% to 46%, according to the GAO. In some cases, the
agreements also require the purchase of life insurance naming the
pension-advance company as beneficiary.
For investors, these seemingly safe income investments are
fraught with risk. One major pitfall: Some pension-advance
transactions have been invalidated in court because of federal laws
prohibiting the "assignment," or transfer, of certain types of
Despite the regulatory scrutiny, Web sites such as
Buy-My-Annuity.com and USPensionFunding.com continue to tout the
benefits of pension-advance transactions. During a long period of
low interest rates, the deals can attract income-hungry investors
with advertised yields that often range from 5.75% to 7.75%,
according to the Securities and Exchange Commission.
This summer, Missouri passed a law prohibiting pension advances
for public employees, while a new Vermont law notes that the
transactions can be treated as unlawful lending.
The GAO recently examined 99 lump-sum offers from six
pension-advance companies. Almost all of the offers amounted to
roughly half of the minimum lump sum that the pensioner could be
offered by a private-sector defined-benefit pension plan under
GAO also calculated interest rates for the lump-sum offers and
found that most were well above the legal maximum, or "usury"
rates, that some states have set for consumer credit. California,
for example, has a usury rate of 12%, but the GAO found that
pension-advance offers to California residents carried effective
interest rates of 27% to 83%.
Although pension advances resemble loans, companies offering
them often insist that they are not loans--and thus sidestep state
and federal lending regulations. The federal Truth in Lending Act,
for example, requires that lenders disclose to consumers an
effective interest rate for each transaction, but most of the
pension-advance companies examined by the GAO did not disclose this
information. Absent such disclosure, consumers considering
pension-advance offers often don't realize that they could borrow
the same amount of money at a far lower interest rate, says Stuart
Rossman, director of litigation at the National Consumer Law
Even when the terms are clearly unfavorable, some retirees feel
a pension advance is the only way to stay afloat. Pinched by the
financial crisis in 2008, a retired Air Force major in Virginia
agreed to sign over 96 months of military retirement pay--more than
$230,000 worth of future payments--in exchange for a lump sum of
about $104,000, according to bankruptcy-court documents. He knew
that the transaction was essentially "a very high-interest loan,"
says the retiree, who asked not to be named. But he was struggling
with a hefty mortgage, credit card bills and a declining income, he
says, and "when you've got nowhere else to turn, you sometimes make
poor decisions." After he filed for bankruptcy in late 2009, the
court found that the pension-advance agreement was invalid due to
federal laws prohibiting transfer of military retirement pay--and
he was not required to make further monthly payments.
Before taking a pension advance, consider alternatives such as a
bank or credit union loan, the FTC suggests. Your pension plan may
also offer a lump sum in lieu of monthly payments. If you're
struggling to pay bills, consider contacting a nonprofit consumer
credit counseling agency, which can help you work out a debt
repayment plan. Find an agency at the National Foundation for
Credit Counseling (
From the Investor's Perspective
Advisers selling pension- or disability-based income investments
tout their predictable income and generous yields. Yet these
investments often stand on shaky legal ground, and the income
stream can quickly run dry. Investors are typically buying an
individual's pension stream. In some cases pensioners simply stop
forwarding the payments.
Lawrence Vicari, a 51-year-old engineer in Torrance, Cal., in
2012 invested roughly $62,500 in a veteran's disability income
stream that was to pay him $750 a month for ten years, according to
a lawsuit he filed last year against Little Rock, Ark.-based VFG,
LLC, formerly known as Voyager Financial Group. Vicari had received
less than a year's worth of that monthly income when the veteran
stopped forwarding the payments, says Vicari's lawyer David Kupfer.
"It was portrayed as a virtually fail-safe type of investment,"
Kupfer says, in part "because it involved the government."
The sale of the investment was unlawful due to federal laws
prohibiting the assignment of U.S. government pension and
disability benefits, and VFG knew, or should have known, that
investors would be unable to enforce the contracts, Vicari alleged
in his complaint. In its answer to the complaint, VFG denied the
charge. VFG did not respond to a request for further comment.
While Vicari's case is ongoing, courts in some other
pension-advance cases have found that the agreements are illegal
and can't be enforced. In addition to military pensions, most other
federal government pensions, certain state government pensions and
large private pensions covered by the federal ERISA law are subject
to anti-assignment rules, Rossman says.
What's more, commissions on these pension-based investments can
amount to 7% or more, according to the SEC. And unlike traditional
fixed-income investments, the pension investments may be difficult