Wednesday, January 11, 2012

Financially Strapped Seniors Selling Off Pension, Retirement Payments To Meet Pressing Cash Needs?

In Greenville, North Carolina, The Daily Refector reports:

  • Many people are doing whatever they can to make it to the next mortgage payment or bill paying day. In some cases people face foreclosure on their homes and need a large cash payment in order to stop the bank.


  • Retirees and veterans who have a defined benefit pension now have another opportunity to get a lump sum payment but it does have a significant downside. They can sell the future stream of monthly pension payments to an investor who will provide a single lump sum of money in return.


  • This use of the secondary market has become very attractive for many investors. One feature of the pension investment is that the retiree signs a contract that yields a 5-6 percent interest rate for the purchaser. These transactions also are facilitated by websites that seek retirees willing to sell their pensions. These middlemen bundle the pension investments and send a sheet showing all available options to investors. The investor works through the middleman in completing the purchase transaction.


  • For this service the middleman agency collects a sizeable fee that is taken out of the stream of payments. Although the stated interest rate may only be 5-6 percent for the investor when the cost of middleman fees are added the effective interest rate is considerably higher.

***

  • Congress has [] taken notice of the pension purchasing business. Sen. Tom Harkin of Iowa heads a U.S. Senate committee that is investigating the pension-for-cash contracting business.


  • He is concerned that retirees are not fully aware of just how much interest they are paying as a result of signing away pension payments. There also is concern that retirees who are desperate have not thought through the effect of losing monthly payments.


  • Even though the Senate investigation is in its infancy, the business of purchasing pensions is not. It is moving forward just as fast as investment firms can find new methods of advertising it.

For more, see Pension payments sold to middlemen.

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