Pension and Settlement Streams Raise Regulatory Concerns
Concerns about pension and settlement income streams prompted an investor alert from regulators last month. The Securities and Exchange Commissionand the Financial Industry Regulatory Authority warned pension holders, individuals receiving income from lawsuit settlements and investors about abuses in the marketing of products referred to as pension loans, pension income programs, mirrored pensions, factored structured settlements or secondary-market annuities.
These products are created and sold by factoring companies, which may refer to themselves as pension-purchasing companies or structured-settlement companies. The business model is pretty straightforward: Purchase a stream of income for as little as possible, sell the stream of income to an investor and pocket both the difference between the purchase and sale price plus various transaction fees. Factoring companies will offer a lump-sum dollar amount to the pension or settlement recipient that is less than what the current value of all future payments is worth. The companies may also sell the income stream without properly disclosing risks and charging high transaction fees.
Regulators advise those considering selling their pensions or settlements to question whether the transaction is actually legal. Federal law may prevent or restrict retirees from “assigning” their pensions. A sale of a structured settlement may need court approval. Would-be sellers should also question whether they are receiving a good price, what the reputation of the purchasing company is and what the tax consequences are. Also, they should ask if a life insurance policy will be required and factor that cost into the actual aftertax proceeds.
Investors considering pension or structured income-stream products should realized that the advertised yields of 5.75% to 7.75% may not be as attractive as they first seem. Commissions can be 7% or higher, the securities will likely not be registered with the SEC, they can be very difficult to sell and your “rights” to the income stream could face legal challenges. Investors need to specifically inquire about the financial status of the organization making the payment and who is sending the check. Some arrangements call for the pensioner to manually send the check and that person may refuse to do so. As is the case with any other investment product, look into the reputation of the company offering the product and find out how the salesperson is being compensated.
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