Retirees Beware: Pension Loans Trap the Unwary

Category: Financial and taxes in retirement

April 29, 2013 – A front page story in yesterday’s New York Times spotlighted the newest way for retired Americans to get into serious financial trouble. The story, “Loans Borrowed Against Pensions Squeeze Retirees highlighted the growing trouble in Pension Advances. The idea behind them is that in exchange for an upfront advance (called an advance, but really a loan), you sign over your pension checks far into the future. Cash-strapped and often unwary retirees are increasingly using these loans, but paying interest rates and fees from 27% to as high as 106%.

The article used the experience of Ronald E. Govan as an example. This disabled veteran took out a $10,000 loan against his pension. His payments were $353 per month for 60 months, totaling $21,180 for an interest rate of 36.4%.

Of course the ads and telephone calls promoting these loans are not talking about their high costs. Instead they are promising an easy way to get out of debt, pay off credit card loans, or even just plain splurge. The marketers of these so called advances are targeting folks with good pensions – teachers, policemen, government workers, and especially, retired military. While it might seem like a smart thing to do, get an advance now and get out of debt, it isn’t. The biggest problem is the high cost of these loans – you will pay so much more back than you got in the first place that you will probably fall deeper into debt. That’s because the companies deduct payments from your pension before you ever see it, reducing the amount you have to pay for your other expenses. While there might be some good uses for these type of loans, consumer advocates are generally quite concerned about them.


Because it is illegal for veterans to assign their government pensions to a third party, the firms offering these “advances” require you to open an account with a financial institution related to them. As soon your monthly pension is deposited, they deduct the amount you owe. Some of the firms named in the article were LumpSum Pension Advance, Pension Funding LLC, and Pensions, Annuities & Settlements.

Consumer groups and federal and state regulators appear to be taking aim at these loans.
The Times article also pointed out another alarming trend – “households headed by people age 75 and older devoted 7.1% of their total income to debt payments in 2010, up from 4.5% in 2007.” According to the Census Bureau, median debt levels for households headed by someone over 65 more than doubled between 2000 and 2011, to $26,000.

Comments:
Have any of you been approached by a pension advance firm, or have experience with them? Please share your thoughts in the Comments section below.

Posted by Admin on April 29th, 2013

4 Comments »

  1. The interest rate is what is killer here! We definitely need to make sure we are offering discounted interest rates for loans to our disabled or elderly citizens!

    by Oakmonte Village — April 30, 2013

  2. How disgraceful ,

    by Bill — May 1, 2013

  3. Would someone better with numbers please explain how to calculate the interest rate. Mr. Govan borrowed $10k, and paid $11.180k interest. To innumerate me, he paid 111.8% in interest over five years, which is 22+% per year. Outrageous, but not 36.4% (which rate would produce, I think, about $18k in interest)

    by OldNassau — May 16, 2013

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