A pension, including a secure military pension, is often described as a nest egg we build to provide for a comfortable retirement. It’s earned over years of service and paid to you, usually in monthly installments, when you retire.
A military pension advance can be a vital tool in times of financial crisis. But it can just as easily be a way for predatory lenders to get their hands on all or part of that precious nest egg.
Before you can evaluate the risk/reward equation of a pension advance, it is important to understand exactly what a pension advance is, and the varying situations where it is and is not worth the risk.
There are provisions in many pensions that allow you access to them before you retire – often, at age 55. But if you take that money out early, it will lower your monthly pension payments and likely subject your pension to a 10% penalty. You can contact the Defense Finance and Accounting Service (DFAS) at 1-888-332-7411 for information about early access.
Remember, a pension is money you have earned during your career that has been placed into a secure account to provide savings for retirement. A pension advance is a product similar to a payday loan that offers a lump sum cash payment in exchange for all or part of a person’s monthly pension check. It is a loan that puts your nest egg, and therefore your retirement security, at risk. The monthly payments you make on the advance typically continue for five to 10 years.
Is a pension cash advance worth it? The answer to that question can be complicated. It helps to understand that government regulations and protections have been created to restrict predatory lending of this kind. This is why many of these lenders operate online, where they are not subject to local or state restrictions.
For example, here is what the North Carolina attorney general’s website has to say on the matter: “When you take out a pension advance, you are basically taking out a loan against your military, government, or corporate pension. Think twice before you sign, because these loans often charge extremely high interest rates. Companies offering these products try to disguise them and avoid referring to them as loans, because their interest rates are often much higher than North Carolina law allows.
“Companies that push pension advances often pretend to be in the business of helping military and other retirees to ‘Take control of your pension and your life.’ In fact, they prey on people who are having financial difficulties.’ ”
Remember: The U.S. military does not endorse or recommend any predatory lending companies, and their use of military or patriotic-sounding company names is merely one sign of deception.
Military Pension Advance Pros
Warnings about the predatory nature of many pension advance loans are valuable, but are there times such a loan can be right for you?
There are. Remember, protecting your nest egg is important, but one benefit of that nest egg is that it is there in case of financial stress. In a medical or other family emergency, access to your pension may be an important solution.
If you weigh the need for immediate financial relief against the security of monthly pension benefits, you may decide a pension advance is the best course of action. Some situations require access to a lump sum of cash, even if that lessens future security.
That security is put at risk in obtaining a pension advance, and that risk must not be overlooked. Neither should the high interest rates that typically come with the advance, which may then put the borrower in worse financial straits than they were in when they applied for it.
If, for example, you take out a $20,000 cash advance against your pension, and that loan is paid back at 50% interest over 10 years (and pension advances can charge as high as 106% interest), you will pay $840 per month for a total of $100,755.
That is $80,755 of your hard-earned pension funds being committed to a predatory lender.
While there are situations where that kind of sacrifice is necessary, there are many more situations where better, less extreme solutions are possible. The most important takeaway here is to be informed about the pros and often-camouflaged cons of a pension advance.
Military Pension Advance Cons
As the North Carolina attorney general points out, predatory lenders describe pension advances as “taking control of your pension,” when in fact they do the opposite. These loans require surrendering control of your pension to the lender, often at an illegally high cost.
North Carolina is not alone. Many government agencies have issued consumer warnings meant to protect vulnerable retirees and veterans about predatory lenders. The cons are very real:
- Interest rates on a pension advance can range from 27% to 106%.
- Pension advances may be illegal in your state. Be wary of lenders who operate online, where they may be able to dodge local and state laws.
- Lenders offering pension advances may require veterans and retirees to purchase life insurance that benefits the lender, not the spouse and family of the borrower.
- Check the tax implications. A pension advance in a lump sum can be counted as income for the current tax year. That could lead to a higher tax payment and assignment to a higher tax bracket.
- The lender may require the borrower to set up a joint account so the lender has direct access to your pension payments. Never do this! But note that it’s a measure of how far predatory lenders will go.
Bottom line: The cons of a pension advance must be weighed against possible pros and the urgency of your financial situation. Remember that many states have passed laws against the way lenders set interest rates and demand access to funds or purchase of insurance to protect their interests, not yours.
Should You Use a Pension Advance?
As anyone who serves in the military knows, it is important to make plans, but all preparations must include adjustments for unexpected events and circumstances. The same is true in your financial life.
Pension advances may be the best solution in extreme circumstances, but for most surprises or events in life, better alternatives should be available. Either way, it is important to have a clear eye when viewing your options.
It is also important to get help before making any drastic decisions. A smart place to begin is a nonprofit credit counseling agency, where certified counselors can assess the situation and suggest other options for eliminating debt. The key word here is “nonprofit,” and these counselors are trained to provide the best solutions for consumers to get out of debt.
Indeed, contacting a nonprofit credit counseling agency before debt becomes a major crisis may be the best way to avoid predatory lenders in the first place.
Retirement and Pension Tips
The main piece of advice you should follow when considering taking a pension advance is: Do NOT do anything drastic without consulting outside advisors. Here’s some other advice:
- Do not give creditors – or anyone – access to your monthly pension payments.
- Be extremely cautious if asked to set up a life insurance policy with the pension advance company.
- Do not get lured in by a company’s slick marketing techniques, including the use of patriotic symbols or claims of government approval and support that are designed to win the trust of military people.
- Try other options first. A pension advance is a last resort.
Remember that a military pension cannot legally be assigned to a third party.
Military Pension Advance Alternatives
Some alternatives to a military pension advance are better or more desirable than others, but the key point is that almost all alternatives are better than a pension advance.
Learning about and understanding the options is the key. The best place to start is with a financial coach or with counseling from a professional.
Nonprofit credit counseling agencies offer both, with the added benefit of sliding pay scales and expertise in navigating your way through financial difficulties. These counselors have training and access to solutions that may not be as apparent as those with lenders trying to sell you a pension advance (because predatory lenders spend a lot of money advertising their products).
Keep other, less-predatory loan options in mind. VA loans, home equity loans and personal loans from a bank, savings and loan, or credit union are all regulated and borrowers are protected by the Servicemembers Civil Relief Act as well as the Military Lending Act.
About The Author
Phil Sheridan writes about military benefits for Military Money. Phil spent over 30 years learning about labor negotiations, salary caps, stadium negotiations and a lot of other finance-related matters as a reporter and columnist for the Philadelphia Inquirer and ESPN.
- N.A. (ND) Pension Advances. Retrieved from https://ncdoj.gov/protecting-consumers/credit-and-debt/pension-advances/
- Cole, Kim. (ND) Should I Take A Military Pension Advance? Retrieved from https://navicoresolutions.org/should-i-take-a-military-pension-advance/
- Church, Carol. (July 3, 2018) Pension Advances: Not a Good Option for Military Retirees. Retrieved from https://oneop.org/2018/07/03/pension-advances-not-a-good-option-for-military-retirees/
- N.A. (ND) https://www.usa.gov