Psst! Wanna Sell Your Pension?

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Photograph by vm/Getty Images

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Photograph by vm/Getty Images

Here's an idea you should run, not walk, away from: selling your pension to third-parties in exchange for a cash advance. These schemes are cropping up more and more lately, so much so that Finra, the self-regulator of the brokerage industry, and the Securities and Exchange Commission and a few state regulators, including those in New York and Massachusetts, have issued alerts about them.

Here's how they work: Suppose you need cash and are drawing a pension. Cash settlement firms will offer you a discounted cash amount (and that's likely a HUGE discount) against the future value of the pension payments. Military veterans seem to be a particular target. Why? Because generally you can retire after 20 years of service and likely will draw benefits for many years -- a huge win for the entity offering you the cash lump sum. For example, let's say you're entitled to a $2,000 a month pension. That's $720,000 over 30 years, not an unlikely scenario, hence the interest in offering you a lot less to make that kind of money.

How exactly this works isn't clear because pension benefits generally aren't assignable. One method involves having the pensioner open an account that the company giving you the upfront cash controls, and having the pension check deposited directly.

In addition to possibly being illegal, there are other troubling wrinkles to such deals. One involves life insurance. Some cash settlement firms may require you to buy a life insurance policy naming them as beneficiary in the event you die too soon. That policy is an out-of-pocket cost and if you're older with health problems, it won’t be cheap. Also, if you already carry other life insurance, you may be considered ''maxed'' out by insurers. There's also the question of whether insurers will challenge your naming them as beneficiaries since the folks giving you the cash have no direct relationship to you.

The deals can also cause problems on the tax front. Surprise, getting a big lump sum can land you in a higher tax bracket. And part of a pension's appeal is that the monthly payments occur when you are retired without a steady pay check and presumably in a lower tax bracket.

Meanwhile, once the buyers acquire your pension rights, they're likely to bundle them with others and sell them to other retail investors. And if you think that's a good deal, I have a nice bridge to show you.

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