Caution! Selling Your Pension—or Buying Someone Else’s—Is Risky Business

Financial Industry Regulatory Authority (FINRA)

Do you receive a monthly pension from a former employer? Are you getting regular distributions from a settlement following a personal injury lawsuit? If so, you should know that financial regulators have warned consumers about the potential pitfalls for anyone thinking about selling their rights to an income stream. They also cautioned investors that buying the rights to another person's income stream can come with high fees and considerable risks.

Here’s how these transactions work. Anyone receiving a monthly pension or regular distributions from a settlement following a personal injury lawsuit may be targeted. Salespeople offer an immediate lump sum in exchange for the rights to some or all of the payments you would otherwise receive in future. Typically, you would sign over the rights to some or all of your monthly payments to a factoring company in return for a lump-sum amount. This sum will almost always be significantly lower than the present value of that future income stream.

If you are considering selling an income stream, ask these important questions:

  • Is the transaction legal? Federal law may restrict or prohibit retirees from "assigning" their pension to someone else.
  • Is the transaction worth the cost? Find the discount rate that the factoring company has applied to your income stream to come up with the lump sum you will get and compare this rate to alternatives such as a bank loan.
  • What is the reputation of the company offering the lump sum? Check the factoring company's record with the Better Business Bureau, and research the firm on the Internet and with a financial professional.
  • Will the factoring company require life insurance? The factoring company may require you to purchase a life insurance policy, which will add to your transaction expenses and reduce your payout.
  • What are the tax consequences? The lump-sum payment you collect may be taxable.

If you are thinking about buying the rights to someone else's pension or structured settlement, be aware that:

  • You may encounter commissions of seven percent or higher.
  • Pension and structured settlement income-stream products may or may not be securities and likely are not registered with the SEC, so information may be hard to get.
  • These products could be difficult to sell if you need money and want to sell the product quickly.
  • Your "rights" to the income stream you purchased could face legal challenges.

Whether you are thinking about selling a pension or structured settlement, or buying one from someone else, remember that the risks in doing so are substantial and the safety net if things go wrong may not be very strong. Don’t shy away from asking probing questions. And shop around.

For more tips, read the Pension or Settlement Income Streams—What You Need to Know Before Buying or Selling Them. The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) teamed up to issue this alert.

Gerri Walsh is Senior Vice President of Investor Education at the Financial Industry Regulatory Authority (FINRA).

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