Photo (cc) by jonny goldstein
Pension advances can seem like a sweet deal if you’re in a financial bind and need some quick cash to make ends meet. But the cost of a pension advance is steep and could threaten your retirement security.
According to a warning from the Consumer Financial Protection Bureau, pension advances can take a significant bite out of your retirement income when you have to pay back the advance plus its high fees and interest.
Pension advance companies offer a loan or cash advance in exchange for a portion, or all, of your future pension payments. The CFPB said government retirees are prime targets for pension advance businesses.
Military retirees and veterans who receive monetary benefits from the Department of Veterans Affairs (VA) have been offered pension advances even though it’s illegal for lenders to take a military pension or veterans’ benefits. Many of those companies use patriotic-sounding names or logos and even claim they are endorsed by the VA as a way of enticing potential customers.
Before you risk the financial security of your golden years with a pension advance, the CFPB recommends discussing alternatives with a financial coach or credit counselor.
The CFPB said you can protect your pension from being exploited by avoiding these pension advance traps:
- High fees and interest. Before you sign on the dotted line, make sure you understand the fees and interest rate associated with the advance.
- Don’t give away control of your benefits. Some pension advance companies arrange for your monthly pension payments to be deposited in a newly created bank account so they can withdraw payments, interest and fees directly from the account.
- Don’t agree to buy life insurance that you don’t want or need. Pension advance companies can sometimes require you to buy life insurance naming them as the beneficiary. “If you sign up for life insurance with the pension advance company as your beneficiary, you could end up footing the bill, whether you know it or not,” the CFPB said.
Pension advances sound as bad as payday loans to me. The message from the CFPB seems obvious: steer clear of pension advances.
Have you or someone you know had any experience with a pension advance? Share your comments below or on our Facebook page.