The Typical Pension Advance or Loan Transaction


The Attorney General provides Consumer Alerts to inform the public of unfair, misleading, or deceptive business practices, and to provide information and guidance on other issues of concern. Consumer Alerts are not legal advice, legal authority, or a binding legal opinion from the Department of Attorney General.

If you receive a pension from your former employer, you may be the target of salespeople offering you a lump sum payment today in exchange for signing over some or all of your monthly pension checks for a future period of time-typically 5 to 10 years. The pitch goes something like this: “Turn your future pension income into cold, hard cash today. It’s your money, you deserve it.”

Even if you don’t have a pension, these same salespeople might approach you to invest in funding this type of loan or “advance” made to a pension borrower. In exchange for your investment of a fixed dollar amount, you are promised repayment of the amount invested plus a rate of return (typically 5.75% to 7.75%) for a set number of years. The money you invest is repaid to you-and you may be told that it is “guaranteed” or “secured”-by the pension borrower’s future pension checks.

Sound like a great deal for everyone? Think again. As a pension borrower, a pension advance can be very expensive, loaded with hidden costs and fees, and sabotage your long-term financial security as your pension checks are reduced or wiped out for years to come. As an investor, you may not be given reliable information about the risks of your investment, the commissions and fees charged by the pension advance salesperson or “broker” can be expensive, and your investment may be “illiquid” and difficult to sell. In addition, these pension advance transactions may be illegal and violate state usury (interest limit) laws, federal and state laws prohibiting the assignment or sale of a pension, or both.


Before you consider a pension advance or investing in someone else’s pension, you should know all the facts about these transactions and proceed with caution.

Pension advances, also known as pension sales, loans, or buyouts, require you to sign over some or all of your monthly pension checks for a future period of time, typically 5 to 10 years. In return no credit check payday loans East Liverpool OH, you get a lump sum payment that will be less than the future pension payments you sign over. In other words, you are agreeing to give up the future pension income that you may need to live on in exchange for a reduced, one-time payment today. The extra amounts you pay are due to the “discount rate” that is applied to reduce the value of your future pension dollars to today’s present value. In addition, some of the extra amounts you pay will be pocketed by the pension advance salesperson as commissions or fees, and will also be used to repay (with interest) any investor who funded your pension advance.

Pension advances are an expensive way to borrow money, and include fees and costs that can push their “effective interest rate” or “annual percentage rate” (APR)-the cost of credit on a yearly basis-to over 100%. In addition, borrowers are often required to buy a life insurance policy to ensure repayment of the advance, which makes the transaction even more expensive. For some pension advance transactions, the borrower is required to set up a joint bank account with the pension advance company or investor and deposit his or her monthly pension check into this account so that repayments can be automatically and immediately withdrawn. It is also important to note that you cannot repay a pension advance early (which would save you interest and fees), because payments promised to the investor who funded your advance depend on extracting your pension benefits for the full 5- to 10-year period that you agreed to.