Pension advances filled with pitfalls, FTC warns

Trading your pension for quick cash, or borrowing against it, is an idea to be leery of, the Federal Trade Commission warned this week.

Getting an advance payment of your pension means signing over years of payments you would be due at retirement. The FTC says five to 10 years is typical. Making that trade can be tempting because you end up with a lump sum of cash years before you would be due to collect on the pension.

However, in addition to agreeing to forfeit those checks that are intended for you to survive in retirement, you also will be paying fees and interest, and likely will have to buy additional life insurance to make sure the lender gets its money. With all the costs totaled, the FTC said it is possible you could end up paying an annual percentage rate of more than 100 percent.

Before you start spending your pension in advance, the FTC suggests answering some questions first, including whether your pension is even eligible for this type of arrangement.

Other questions, the FTC suggests resolving are:

What are the costs? Get in writing the terms of the deal you'll be considering, including the interest rate, length of the contract, fees that will be charged, as well as any other charges.

Is life insurance required? Companies that offer pension advances want to make sure they get back their investment if you die before you get to collect the pension checks. So, they might ask you to get an insurance policy naming the company as beneficiary. That will add to the costs, and you need to know how much.

What effect will getting that money have on your taxes? The FTC suggests doing some research, including checking with the state attorney general and the Better Business Bureau to see if the company has a history of problems with consumers. In addition, doing a search online can show if others have had problems.

As an alternative, the FTC suggests getting a loan from a credit union or small loan company, and to comparison shop on rates.

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    Mitch Lipka is an award-winning consumer columnist. He was in charge of consumer news for AOL's personal finance site and was a senior editor at Consumer Reports. He was also a reporter for The Philadelphia Inquirer and the South Florida Sun-Sentinel, among other publications.