Watch out for lump sum pension schemes

Be careful of lump sum pension scams. Photo Credit: 2bgr8/Wikimedia Commons/CC-BY-SA

An ever-diminishing number of people are offered a pension, a defined benefit of a monthly payment for a set period upon retirement. Occasionally, some people are offered a lump-sum pension payment either by their employer or a third party and consumers need to be very cautious about taking them.

That is not supporting the troops

A recent post on MSNBC details how a number of veterans are being swindled out of their military pensions by third party businesses that offer them a lump-sum pension payouts. One man signed over 8 years of his pension payments, totaling $103,000, for a $42,131 payment from Retired Military Financial Services. Essentially, it was a cash advance loan at more than 50 percent interest, though such companies will insist that they aren’t lenders in the legal sense.

RMFS and its business partner, Structured Investments, were both sued for fraud in class-action lawsuits and ordered to repay millions to consumers. Not only that, but the companies were treading on dangerous ground as, according to Forbes, but selling a pension to a third party is illegal.

Watch out for business speak

How RMFS and Structured Investments, as well as a large number of companies, skirted rules about buying pensions is that they asserted what they offered was an “annuity utilization contract.” Essentially, the party offering the payout opens a joint bank account with the person seeking the payout. The pensioner deposits their pension check into the account and the buyer withdraws all or a portion of it.

Military retirees are a common target for such schemes, as the military is one of the few employers that still gives its employees a pension. Numerous horror stories exist of similar situations. For instance, a 2009 CBS article recounts the story of a career Navy man who signed over 3 years of his $900 monthly pension payments, $32,400, for a $15,000 lump sum. Expressed as interest, it was a 77 percent APR loan.

Private sector employees are equally vulnerable. According to ABC, a company called Securities America was ordered to repay $2.5 million in fines and $13.8 million to victims in 2008, for convincing 32 Exxon employees to cash out their pensions in a lump-sum payments and invest it with Securities America. Collectively, they lost $11 million with the company and sued.

Guaranteed cash upfront or for life

Many employers will offer lump-sum pension buyouts to employees to get them to retire early, which according to Consumer Reports, more than 70 percent of people who are offered them take. There is no fraud involved there, but there is a risk to the receiver of said payment. The risk is that a pension is a guaranteed monthly income for a particular period; a lump-sum is just a huge pile of cash.

Pensions need to be safe-guarded for those who have them. A lump-sum can be a whopping great pile of money at once, but anyone who takes it has to be very careful of what they do with it, as that money is part of how they are supposed to live in retirement.