Pension loans and why you should avoid them
It’s a sad but inevitable reality: No matter how bad your financial situation is, there is always someone looking to get rich by making your already bad situation even worse. And many of these “people” have found the retirement loan business (also known as the retirement loan) to be particularly profitable.
On July 1, the Federal Trade Commission issued a warning to consumers about the dangers of early retirement plans:
If you’re trying to make ends meet, here’s a pitch that might interest you:
“Convert tomorrow’s pension checks into hard cash today. “
Does that sound tempting? Think again. The Federal Trade Commission, the national consumer protection agency, informs consumers that retirement advances, also known as retirement sales, loans, or buybacks, come at a very high price.
Most pension advances require you to sign all or part of your monthly pension checks for five to ten years. The lump sum payment you receive in return is less than the pension payments you give up, so you are giving up the money you need to live. And retirement advances often require retirees to purchase a life insurance policy – with the retirement loan company as the beneficiary – to ensure that repayments continue.
The FTC statement included a link to the agency’s “Retirement Advances: Not So Fast” consumer information site, which points to other potential pitfalls of retirement advance loans: For many loans, the annual interest rate exceeds 100%. Even for loans that offer reasonable rates, there can be serious tax implications: “Getting a large lump sum can put you in a higher tax bracket. “
If you are in a bad enough financial situation to consider a pension loan, there are better and cheaper ways to resolve it. Among other things, the FTC advises checking with your local credit union if they offer short-term loans or discussing with your creditors about arranging payment plans.
For people who have actually taken out retirement loans, what have been the results? An online search for the phrase “retirement loans” suggests that loan recipients have found themselves in worse shape than before.
The first page of Google’s results for “retirement loans” included a date from April 2013 New York Times story “Retirement Loans Push Retirees Into More Debt,” a Forbes.com article on the subject titled “Retirement Loans Still an Unregulated Poison” and a website for a real retirement loan company whose the speech looks a lot like this. warned consumers, “Have you ever been short of cash and wished you could tap into your future retirement pension for funding?
In the state of Maine, a group called Pine Tree Legal Assistance published “Five Signs of Predatory Retirement Loans” that apply to residents of all US states and territories. Two of them, warnings against high interest rates and the mandatory purchase of life insurance policies, were already covered by the FTC. But PTLA also warns people to watch out for these signs:
1. Use the word “advance” instead of “loan” – Companies try to hide their intentions by describing their offers as “advances” rather than loans. This is done for two reasons: to hide the truth from you and to charge very high interest rates which are illegal in many states.
2. Target government veterans or retirees – People receiving government pensions are a prime target for these lenders because of the guaranteed income. If you are receiving a government pension, be even more careful.
3. Encourage you to [set] open a new bank account – Many of these companies will encourage their customers to agree to create a separate bank that will be controlled by the company. They are doing it because they have to find a way around the law that says it is illegal to pass government pensions to third parties.
Incidentally, Pine Tree Legal’s first warning – using a word other than “loan” – applies to other forms of debt as well. Savvy homeowners, for example, understand that the ability to “take equity out of their home” actually means “to go into debt with your home as collateral,” and the only thing worse than going into debt is to do so by borrowing money from someone who is not even honest enough to admit that “going into debt” is exactly what you are doing here.