The SEC and FINRA recently issued an Investor Alert regarding buying or selling pension or structured settlement income streams. A structured settlement typically represents a stream of payments stemming from the resolution of litigation, such as personal injury lawsuit. Pensions also provide a defined-benefit income stream, which is intended to compensate an employee during retirement.
These income streams are valuable assets, and factoring companies target recipients of these income streams to accept an immediate lump sum payment in exchange for the rights to receive some or all of the payments that the recipient of the income stream would receive in the future.
Recipients of a pension or structured settlement income streams may be interested in selling their future rights in exchange for an immediate lump sum payment, particularly when faced with significant current expenses. Conversely, buying the rights to someone’s future income stream may be attractive to investors who wish to avoid stock market volatility, particularly given the current low interest-rate environment.
For recipients of an income stream, the lump sum payment almost always will be significantly lower than the present value of the future income stream from the pension or structured settlement. The Investor Alert contains a checklist of questions to consider before selling away an income stream:
- Is the transaction legal? Federal law may restrict or prohibit retirees from “assigning” their pension to someone else.
- Is the transaction worth the cost? Find the discount rate that the factoring company has applied to your income stream and compare this rate to alternatives such as a bank loan.
- What is the reputation of the company offering the lump sum? Check the factoring company’s record with the Better Business Bureau, and research the firm on the Internet and with a financial professional.
- Will the factoring company require life insurance? The factoring company may require you to purchase a life insurance policy, which will add to your transaction expenses and reduce your payout.
- What are the tax consequences? The lump-sum payment you collect may be taxable.
- Does the sale fit your longer-term financial goals? Consider how to replace the lost future income stream, as well as whether you are getting the best deal for selling your future income stream.
For investors, buying the rights to someone else’s pension or structured settlement income stream may look like a good alternative to other options because advertised yields commonly range from 5.75 percent to 7.75 percent. Investors typically purchase the right to receive a specific amount of monthly income for a set number of years. The Investor Alert contains a list of considerations for investors who are interested in purchasing the right to receive another person’s income stream:
- These products can be expensive. You may encounter commissions of 7 percent or higher.
- Pension and structured settlement income-stream products may or may not be securities and likely are not registered with the SEC. As such, reliable information about these products may be difficult to find and resolving disputes should an investment go sour may also be difficult.
- These products are illiquid, which means that they could be difficult to sell. In the event you need money and want to sell the product, you might not be able to do so or you may only be able to do so at a loss.
- Your “rights” to the income stream you purchased could face legal challenges. It may not be legal to purchase someone’s pension. And it may be difficult to legally force the original owner of a pension or structured settlement to forward or assign their income to a factoring company or investor.
“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,” said Gerri Walsh, FINRA’s Senior Vice President for Investor Education.
The Investor Alert also advises investors to consider the following questions before investing:
- Is the financial professional selling the product registered with a state or federal regulator or with FINRA?
- How is the salesperson being compensated?
- Is the salesperson authorized to sell this product?
- What is the reputation of the company selling the product to me?
- What are the tax consequences?
- What organization is ultimately paying you?
- Who is sending the check?
“Investors should always learn as much as possible before making an investment decision, and this is certainly true with respect to investing in pension or structured settlement income stream products,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy. “This alert will help investors understand the costs as well as the potentially significant risks of these transactions.”
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