Beware of Pension or Settlement Income Streams; SEC and FINRA Issue Alert

The SEC and FINRA issued a joint alert on May 9, 2012, warning investors about the risks involved in selling or buying rights to pension or settlement income streams via products like pension loans, structured settlements or secondary-market annuities.

The alert is titled, "Pension or Settlement Income Streams—What You Need to Know Before Buying or Selling Them." The SEC and FINRA urge investors to proceed with caution if engaging in such transactions.

The alert explains that after acquiring the rights to a future income stream (such as a retiree’s pension payments), factoring companies may turn around and sell these income streams to retail investors, often through a financial advisor, broker or insurance agent.

The products — pension loans, pension income programs, mirrored pensions, factored structured settlements or secondary-market annuities — may be pitched to investors with words like “guaranteed” and “safe,” the alert explains. The sales pitch may also promise huge returns that outpace more traditionally conservative investments such as CDs or money-market accounts.

“The advertised returns may sound enticing, but investors should be aware that these investments can be risky and complex,” the alert says.

The investor alert contains a checklist of questions investors should ask themselves 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.

The investor alert also warns investors who might be attracted to the yield offered by buying the rights to someone else’s pension or structured settlement to be aware that:

•Investors 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.

•These products could be difficult to sell if you need money and want to sell the product.

•Your “rights” to the income stream you purchased could face legal challenges.

The Soreide Law Group represents clients nationwide before FINRA. Call for a free consultation on how to potentially recover your losses. To speak with an attorney call 888-760-6552.