By Chuck Epstein
The Federal Trade Commission issued a warning today advising consumers
that they should be cautious before they accept any sales pitches which target their pension plans.
These sales schemes look at re-directing pension payments to a third party and are known as “pension advances,” “pension sales,” “pension loans,” and “pension buyouts.”
The FTC, the nation’s consumer protection agency, warned consumers that these offers “come at a very steep price.”
According to an FTC report, “Pension Advances: Not So Fast
,” these schemes work like this: Pension advances require pension recipients to sign over all or some of their monthly pension checks for five to 10 years. The danger is that the lump sum payment pensioners receive in return is less than the pension payments they sign over. In effect, pensioners are “signing over money you need to live on.”
Worse, these transactions often include fees that can push the effective annual percentage rate, the cost of credit on a yearly basis, to over 100 percent. The pension advances also often require retirees to buy a life insurance policy
, with the pension advance company as the beneficiary, to insure that the repayments continue.
The FTC warned pensioners that getting a large lump sum can put them in a higher tax bracket. It also said many of these schemes cannot be canceled.
Other pension advance alternatives
For people who need the cash now, the FTC suggested alternatives to these pension advance schemes.
These included getting a loan from a credit union or a loan company. The FTC said some banks may offer short-term loans for small amounts at competitive rates, or if this is not available, it suggests getting a cash advance on a credit card
– even if it carries a higher interest rate than other sources of funds. Pensioners who pursuer this option should compare the APR and the finance charges, which includes loan fees, interest and other costs.
If a person cannot pay their bills, the FTC advised them to contact their creditors or loan services and ask for more time to make their payments. It also suggested that pensioners contact their local, non-profit consumer credit counseling service if they need help working out a debt repayment plan with creditors or developing a budget. These groups offer credit guidance to consumers in every state for little or no cost, the FTC said.
Originally published on BenefitsPro.com