As anyone who works with service members knows, a military pension is a valuable and honorable thing. It signifies many years of hard work and devotion to our county. And for many people, it is an incredibly important financial lifeline.
That’s why it’s so galling to hear about companies who prey on veterans by offering so-called “pension advances” that actually consist of predatory loans. Service members, retired service members, and those us who work with these populations need to be aware of this problem.
What are Pension Advances?
These companies market “quick” “pension loans” to veterans (and often other government employees) using flags and patriotic imagery. They know that some retirees have poor credit and may be in need of money for bills or emergencies, while being entitled to guaranteed pension income. The companies take advantage of this by offering a fast lump sum of money that “buy out” some of the pensions. The lump sum, while tempting, will inevitably be worth far less than the pension rights that are signed over, making this a bad deal.
The pensioner then has to pay back the company. Though a pension advance is not legally considered a loan, it really is one, and the effective interest rates can be astronomical—from 20% to 100%+. For instance, a person receiving a $5000 lump sum might end up having to pay back more than $30,000!
There may be very high fees associated with the transaction, and the pensioner may be required to buy life insurance to protect the company’s “investment.” (If the person dies before the company gets all its payments, this policy benefits that company.) What’s more, the lump sum may push some people into a higher tax bracket and cause them to have to pay more taxes.
Are They Legal?
Pension advances are in a legally gray area. Their status varies by state and is constantly changing. Some law firms, states, and government agencies have pursued legal action against companies in this area. Congress has held hearings to consider whether to outlaw the practice. The fact that the companies insist they are “not loans” when all evidence points to the opposite means that they are on legally shaky ground. In many cases, the companies also are not offering the legal disclosures required by the government. But for now, these companies are still operating in most areas.
What Should Be Done if Someone I know Has Participated in a Pension Advance?
Pensionhelp.org, a free government service, may be able to assist those who have questions or concerns about their pension plan, including questions about pension advances.
Legally, it may be possible to have pension advance agreement invalidated, as has happened in some established cases. However, this is not something to rely on. Even when courts find in favor of borrowers, the companies involved frequently declare bankruptcy, leaving the pensioners with nothing.
Those who feel they’ve been taken advantage of by a pension advance may be able to file a complaint with the FTC.
What Other Options Are There?
These companies are able to find customers because people feel they have no other option. However, these terms are so poor that almost any other loan would be a better choice, including a typical high-interest credit card. Other possibilities include:
- Working with creditors to reduce interest rates or consolidate loans. Contact a nonprofit consumer credit counseling agency through www.nfcc.org for more assistance.
- Taking out a home equity loan
- A reverse mortgage
- A personal loan, possibly through a peer-to-peer lending platform like Lending Club
No matter what they or their websites say, experts agree that pension advances are a poor choice for veterans. These companies are not in business to offer a fair service, and financial advisors need to warn their clients about them.
Federal Trade Commission. (2014). Pension Advances: Not So Fast. Retrieved from https://www.consumer.ftc.gov/articles/0513-pension-advances-not-so-fast
Pension Rights Center. (2016). The facts about pension advances. Retrieved from http://www.pensionrights.org/publications/fact-sheet/facts-about-pension-advances