Buying little slices and dices of others’ pension benefits is a hot new investment that’s almost certain to burn both investor and pension holder.
Here’s how this one plays out: The Wall Street Journal reports that promoters or middle men who have sprung up in this industry find somebody who has a pension with a regular set guaranteed benefit and convince them to sell it to someone else for pennies on the dollar.
Investors who want to make a steady nice return on their money buy the rights to pensions and end up getting an effective interest rate typically of 7% on their money. This at a time when you can’t earn more than about 1% on your money in a bank!
But let’s talk about the pitfalls: If you sell your pension for a cash sum, you take a tiny fraction of the real long term value of your pension. The investor gets his 7% and the middle man gets a big piece. You’re left with crumbs and have no steady income as you age through your retirement years.
For the investor, the chief danger is this: What happens if the person receiving the pension decides, “Hey, I’ll just pocket my monthly benefit plus the money I was paid upfront?” In some court cases, these settlements have been ruled illegal automatically. So the requirement that a pensioner pay their benefit to someone else each month is automatically not enforceable. Investors have ended up getting hurt in some states as a result.
The only people making money without risk are the financial planners and new companies that have sprung up to act as intermediaries in this business. It’s yet another example of where trying to cut corners and figure out where to make some dough can come back to burn you.
In this case, everybody is a loser — except for the promoters.
Remember, there are no automatic easy answers right now in a low-interest environment if you’re a saver!