A growing issue with firms offering high interest pension advances is coming to a head as pensioners in many countries realise they may have been duped by salesmen.
The problem is particularly severe in the US where firms offering 401(k) pension fund advances disguised as loans are targeting growing numbers of pensioners in tight financial circumstances.
Those signing up believe they are taking out a loan against their retirement savings, but then realise that most of their monthly pension income will be swallowed up with the repayments.
In addition, the interest rates charged are often far higher than those for credit cards. In many cases they range from 26% to 106%.
In America, the situation is under the spotlight after retired marine Ronald Govan filed a lawsuit in February highlighting the costs of the loans.
Banks not lending
These pension advances are plunging a growing number of retired Americans into debt and biting chunks out of their retirement savings.
With massive numbers of retired people owing money and unable to get credit or loans from mainstream lenders, the market for these firms is huge.
Many of the loan firms involved, which are operating outside state and federal banking regulations, are targeting people with public service pensions, like military veterans, fire fighters, teachers and police officers.
Now the Consumer Financial Protection Bureau is taking an interest, particularly in advertising for loans which highlights banks not lending to older people while flagging that applicants could have extra ‘pension benefits’.
One of the big issues is that the companies do not show interest rates on the loans in their ads or in their contracts.
Pension-based loans
It’s not easy to put a figure on the number of people being affected, but legal aid offices across a slew of states are reporting rocketing complaints from retired people who have run into difficulties.
Now Mr Govan has hit the headlines after being charged more than 35% on a pension-based loan and says he is enraged that retirees and veterans are being targeted in this way.
He says: “I served my country and this is what I get in return.”
Many of the firms concerned were created before the recession and now increasing numbers of people who have been forced to delay retirement and run up debts are being targeted.
There’s also an increasing trend to encourage people to have a ‘splurge’ when they retire to do something they have always dreamed of doing at retirement but never had the money to do, such as taking a dream holiday.
