The SEC and FINRA are warning investors about the risks involved in selling or buying rights to pension or settlement income streams via products like pension loans, structured settlements or secondary-market annuities.
In a joint alert issued Thursday, Pension or Settlement Income Streams—What You Need to Know Before Buying or Selling Them, the SEC and FINRA urge investors to proceed with caution if engaging in such transactions.
As the alert explains, after acquiring the rights to a future income stream (such as a retiree’s pension payments), pension purchasing or structured settlement companies, sometimes called factoring companies, may turn around and sell these income streams to retail investors, often through a financial advisor, broker or insurance agent.
The products go by various names — pension loans, pension income programs, mirrored pensions, factored structured settlements or secondary-market annuities — and may be pitched to investors with words like “guaranteed” and “safe,” the alert explains. The sales pitch may also tout robust returns that outpace more traditionally conservative investments such as CDs or money-market accounts.
“The advertised returns may sound enticing, but investors should be aware that these investments can be risky and complex,” the alert says.
Gerri Walsh, FINRA’s senior vice president for investor education, said in a statement announcing the alert that “consumers should know that a series of potential pitfalls may greet anyone who is considering selling their rights to an income stream.” 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.”