SEC, FINRA Issue Alert on Pension Income Streams

May 9, 2013 ( – The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have issued an alert on the risks of participants selling their rights to an income stream or investing in someone else’s income stream.

The alert, “Pension or Settlement Income Streams – What You Need to Know Before Buying or Selling Them,” urges investors considering an investment in pension or settlement income streams to proceed with caution.

Anyone receiving a monthly pension, or regular distributions from a settlement following a personal injury lawsuit, may be targeted by salespeople offering an immediate lump sum in exchange for the rights to some or all of the payments the person would otherwise receive in future, according to the alert. Typically, recipients of a pension or structured settlement will sign over the rights to some or all of their monthly payments to a factoring company in return for a lump-sum amount, which will almost always be significantly lower than the present value of that future income stream.

“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.”

According to Gerri Walsh, FINRA’s senior vice president for Investor Education, “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.”

The alert contains questions to ask before selling an income stream, such as:

  • 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; and
  • What are the tax consequences? The lump-sum payment you collect may be taxable.

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

A copy of the alert can be downloaded here.