by Antonio Romano
The Financial Industry Regulatory Authority (“FINRA”) recently issued a notice to investors laying out precautions that should be taken before buying or selling pension or settlement income streams.
Individuals may be eligible to receive a pension after working for a number of years, or may receive a structured settlement in a lawsuit. Typically retired government employees, retired members of the military, or a plaintiff in a personal injury case will be approached by a pension purchasing or structured settlement company. These salespeople target those receiving monthly payments from their structured settlement or pension and offer a lump sum to buy the rights to some or all of the payments. The lump sum is less—sometimes much less—than the total amount of the anticipated payments. Individuals might choose to sell the rights to some or all of the payments for a number of reasons, usually being the rising cost of living and/or unanticipated expenses. FINRA and the SEC’s Office of Investor Education and Advocacy issued the Investor Alert to inform anyone considering selling their rights to an income stream—or investing in someone else’s income stream—of the risks involved and to urge investors to proceed with caution.
FINRA discusses several factors to be considered in deciding whether to sell the rights to an income stream. Transaction costs—including brokerage commissions, legal and notary fees, and administrative charges—can be high. Also, it is necessary to consider how to replace the cash flow the pension or structured settlement income provides, especially if that income stream is depended upon to pay monthly or other expenses. Furthermore, some salespeople can be aggressive or persuasive when trying to get an individual to sell the income stream and, in some cases, there may be outright fraud.
FINRA also lays out several important questions to ask. Is the transaction legal? The law may prohibit the right to sell the pension, and selling the rights to a settlement may require approval by a court. Is the transaction worth the cost? On top of being provided an amount less than the income stream is worth, other considerations include fees, transaction costs, commissions, and administrative costs in evaluating whether it is worth selling the income stream. What are the tax consequences? Taking a lump sum may cause the seller of the income stream to lose tax advantages and/or have to pay taxes on the lump sum. Most importantly—does the sale fit long-term financial goals? Selling now to cover an expense may seem wise in the short-run; however, it is crucial to sit and analyze the purpose of the income stream, and the effects of it no longer existing.
Ultimately, it is imperative to do as much research as possible before making a financial decision that can alter long-term financial security, and to take into consideration all of the factors and consequences involved.