Selling Your Pension for Cash Lump Sum Can Be Costly
(NEW YORK) -- For somebody who's facing doctor bills or has missed a mortgage payment, selling your pension benefits for a lump sum can be tempting.
Partly for that reason, pensioners in growing numbers are accepting such offers, say financial regulators. But not all offers are legal, and some contain hidden costs.
Earlier this month, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) issued a joint investor-alert cautioning pensioners to think twice before accepting cash-up-front deals.
In it, Gerri Walsh, FINRA's senior vice president for investor education, said: "Consumers should know that a series of potential pitfalls may greet anyone who is considering selling their rights to an income stream. And any investor who is tempted by the high yield offered by buying the rights to another person's income stream should know that yield comes with high fees and considerable risks."
Her second caution refers to the practice of bundling up purchased pensions into portfolios that are then re-sold to consumers as investments.
Asked by ABC News why FINRA chose now to issue its alert, Walsh says, "FINRA observes trends -- we look around the corner." FINRA viewed with concern pensioners' sale of future benefits.
Two reasons, says Walsh, explain the increased activity. First, she says, people want and sometimes need the value bound up in future benefits. The economic recovery, she notes, has not progressed a quickly for some as for others. More people are tapping into their 401(k)s. The same holds true for pensions.
Second, investors are confronting what she calls "a sustained low-interest environment" that leaves them hungry for higher returns. Some investment products based on portfolios of pensions promise, she says, yields of 5 percent to 7 percent.
Walsh tells ABC News that it isn't always a mistake for pensioners to sell their benefits. But they need to comparison shop (many companies on the Internet offer to buy pensions) and need to make sure they understand the terms of whatever deal they accept.
Typically, the lump sum offered by the buyer is substantially less than the seller would receive over time, if he or she opted not to sell.
"We encourage individuals to determine what that discount value is," says Walsh.
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