Some companies are now offering a "pension advance," usually made in a single lump sum payment, to consumers with pensions -- usually military and government retirees. The firms focus on these consumers as well as those with bad credit, advertising easy access to cash in exchange for signing over future pension payments for a specified number of years.
The associated fees are high, and consumers also may be required to buy a life insurance policy that names the pension-advance company as the beneficiary. The Federal Trade Commission (FTC), Consumer Financial Protection Bureau (CFPB), and Financial Industry Regulatory Authority, among other consumer protection agencies, have issued warnings about pension advances. Unlike a traditional loan, pension advances do not allow for early exit; consumers who signed up for a six-year payout, for example, must hand over the pension for a full six years. Getting a lump-sum pension payment also may push the pensioner into a higher tax bracket and require them to pay additional taxes.
In July, Missouri became the first state to ban the sale of pension advances to public employees. The Government Accountability Office has recommended that the CFPB and FTC study the marketplace and “exercise oversight or enforcement” as appropriate. Investigators who did undercover shopping found “questionable business practices” and concluded that the offers were not any better than other financial offerings, including loans.