Regulators warn about selling — or buying — pensions

The SEC and Finra are warning retirees about the potentially serious consequences of selling their pension or structured settlement to an investor in exchange for a lump sum. In a joint investor alert, regulators also cautioned investors who are considering buying up one of these income streams. Retirees looking to sell off a portion of their pension need to be aware that it may not be legal for them to assign their payment stream to someone else, regulators at the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. warned. They also need to consider the discount rate that the factoring company is using to determine the value of the lump sum: A high discount rate means the retiree is getting a lower lump sum. People who want to sell their settlement or pension also need to question whether the factoring company will require them to take out life insurance in the event the seller dies before all the funds are paid out, according to the alert. On the other hand, investors, lured by the higher yields on these annuity payments, should also watch their back, the SEC and Finra cautioned. After purchasing the rights to the income stream, a factoring company will sell the rights to the annuity payments to an investor in a secondary market through an adviser, broker or insurance agent. These products carry commissions of 7% or more, the regulators pointed out. Further, these packages of income streams are probably not registered with the SEC and exist in a gray area when it comes to whether they are securities. Finally, the investor's right to the income stream could face legal challenges, according to regulators. The sale of income streams to investors in the secondary market is nothing new but it's come under heat from regulators in recent days. On Tuesday, New York Governor Andrew M. Cuomo announced that he has directed the state's Department of Financial Services to investigate 10 companies that provide “pension advances” — products that allow companies to buy up retirees' pension streams in exchange for a lump-sum payment that amount to pennies on the dollar, after accounting for hidden fees and high discount rates.