Investor Assistance (800) 732-0330 www.investor.gov

Investor BulletIn

Pension or settlement Income streams

What You need to Know Before Buying or selling Them

Do you receive a monthly pension from a former 

employer? Are you getting regular distributions from 

a settlement following a personal injury lawsuit? If 

so, you may be targeted by salespeople offering you a 

lump sum today to buy the rights to some or all of the 

payments you would otherwise receive in the future. 

retired government employees and retired members 

of the military are among those being approached with 

such offers. typically the lump sum offered will be 

less—sometimes much less—than the total of the 

periodic payments you would otherwise receive. 

After acquiring the rights to a future income stream 

(such as a retiree’s pension payments), these 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. 

these products go by various names—pension loans, 

pension income programs, mirrored pensions, factored 

structured settlements or secondary-market annuities. 

they may be pitched to investors with words like 

“guaranteed” and “safe”—and may 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.

FInrA and the seC’s office of Investor education and 

Advocacy are issuing this 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.

What Is a Structured Settlement? 

A typical structured settlement involves the 

resolution of a personal injury or workers 

compensation lawsuit, which often takes the 

form of “structured” or periodic payments made 

to the injured party. the periodic payments are 

commonly funded by an annuity issued by an 

insurance company, and are often structured to 

provide a dependable stream of income and a 

degree of financial security to the injured party. 

Selling Your Pension or Structured 

Settlement Income Stream

In a typical transaction, the recipient of a pension or 

structured settlement will sign over the rights to some 

or all of his or her monthly payments to a factoring 

company in return for a lump-sum amount. And the 

lump-sum amount that factoring companies offer will 

almost always be significantly lower than the present 
Investor Assistance (800) 732-0330 www.investor.gov

2

value of that future income stream. (simply put, present

value is the amount of current money needed to obtain 

the future stream of payments and is based on a periodic 

rate of return, such as an interest rate). 

Most states require factoring companies that purchase 

structured settlements to disclose this difference. In 

California, for example, the disclosure must identify the 

dollar amount of the payments being sold, the present 

value of those payments based on a federally established 

interest rate, the amount being paid to the seller, and 

the interest rate calculated as if the transfer were a loan 

and not a sale of the payment rights.

Factors to Consider When Selling 

Your Income Stream

In uncertain financial times, you may find yourself 

searching for immediate cash to help pay for rising or 

unanticipated expenses. For example, even though your 

pension provides steady income, you may not feel it’s 

enough to make ends meet. At first glance, selling your 

future pension benefits might seem attractive, especially 

if mortgage, medical or other expenses loom. under 

certain circumstances, these transactions may have 

their benefits. 

However, there are several factors to consider before 

selling away the rights to your pension or structured 

settlement income. transaction costs—including 

brokerage commissions, legal and notary fees, and 

administrative charges—can be high. You will need to 

think about how to replace the cash flow your pension 

or structured settlement income provides, especially if 

you depend on that income stream to pay monthly 

or other expenses. Furthermore, be aware that some 

salespeople can be aggressive or persuasive when trying 

to get you to sell your income stream and, in some 

cases, there may be outright fraud. 

Before selling away an income stream you currently 

receive, ask the following questions: 

n Is the transaction legal? Federal law may restrict or 

prohibit retirees from “assigning” their pension to 

someone else.1 Furthermore, the secondary sale of 

a structured settlement often must be approved by 

a court, in keeping with the uniform Periodic 

Payment of Judgments Act (uPPJA). Before selling 

your pension or structured settlement, you may 

wish to ask your pension administrator what 

restrictions may apply, review the terms of your 

settlement or consult an attorney. 

n Is the transaction worth the cost? Find the discount

rate that the factoring company has applied to your 

income stream to arrive at the lump-sum amount. 

this is in essence the interest rate that is used to 

bring the future dollars you will receive from your 

pension into today’s present value. the larger the 

discount rate applied to your pension payments, the 

lower its value in today’s dollars. so, if the factoring company is using a high discount rate, you can 

expect to receive a lower lump sum. Compare this 

rate to alternatives such as a bank loan or other 

options that may be less costly. You should also 

take into account commissions, fees, and other 

administrative costs. 

n What is the reputation of the company offering 

the lump sum? Check the factoring company’s record

with the Better Business Bureau, and research the 

firm on the Internet and with a financial professional. 

What complaints have been filed against the 

company? Were complaints resolved to the 

customers’ satisfaction? 

the assignability of pension benefits is addressed in the united

states Code, including provisions governing military benefits

within 38 usC §5301, civil service benefits within 5 usC 

§8346(a) and private pension benefits within 29 usC §1056(d).

1 
Investor Assistance (800) 732-0330 www.investor.gov

3

n Will the factoring company require life insurance?

When you sell your pension, or even a portion of 

your pension payments, the factoring company may 

require you to purchase a life insurance policy. they 

may require you to name the factoring company, or 

the investor buying the income stream from them, 

as the beneficiary of the policy. should you die 

before all payments you assigned to the factoring 

company have been received, funds will be paid out 

from the life insurance policy to cover any remaining 

balance. Keep in mind that purchasing a life insurance

policy will add to your transaction expenses and 

reduce your payout.

n What are the tax consequences? the lump-sum 

payment you collect may be taxable. Discuss the tax 

implications of any transaction you are considering 

with a tax professional. 

n Does the sale fit your longer-term financial 

goals? While you may feel you need money now, 

take time to evaluate your financial objectives down 

the road. It can be helpful to work with a financial 

professional who will not receive compensation 

from, or will not otherwise be involved in, the 

transaction. You may find that there are other 

alternatives to deal with your immediate needs. 

Don’t necessarily take the first offer that comes 

your way.

Investing in Pension or Structured 

Settlement Income-Stream Products

recent stock market volatility and a low interest-rate 

environment have caused investors to look for investments

with attractive returns. Buying the rights to someone 

else’s pension or structured settlement income stream 

may look like a good alternative to other options 

because advertised yields from 5.75 percent to 7.75 

percent are common.

In a typical transaction, the investor buys an income 

stream product from a financial salesperson for a specific

amount. In return, he receives a specific monthly income

for a set number of years. While the yield in such a 

transaction may be attractive, investors should be aware 

of the following:

n these products can be expensive. You may encounter 

commissions of 7 percent or higher. 

n Pension and structured settlement income-stream 

products may or may not be securities and likely 

are not registered with the seC. As such, reliable 

information about these products may be difficult 

to find and resolving disputes should an investment 

go sour may also be difficult. 

n these products are illiquid, which means that they 

could be difficult to sell. In the event you need money

and want to sell the product, you might not be able 

to do so or you may only be able to do so at a loss.

n Your “rights” to the income stream you purchased 

could face legal challenges. It may not be legal to 

purchase someone’s pension. And it may be difficult

to legally force the original owner of a pension or 

structured settlement to forward or assign their 

income to a factoring company or investor. 

Before You Invest 

Given these risks and complexities, ask the following 

questions before you invest: 

n Is the financial professional selling the product 

registered with a state or federal regulator or 

with FINRA? use the resources below to check the 

registration status of the salesperson.

● visit the seC’s Investment Adviser Public 

Disclosure (IAPD) website.
● visit FInrA BrokerCheck or call FInrA 

toll-free at (800) 289-9999.

● Contact your state securities regulator.

● Contact your state’s insurance commission by 

visiting the website of the national Association 

of Insurance Commissioners or calling toll-free 

(866) 470-6242.

n How is the salesperson being compensated? Ask 

the salesperson how he is compensated and how 

this impacts the purported rate of return.

n Is the salesperson authorized to sell this product?

If registered, ask if the salesperson’s compliance 

department has reviewed the product and allows 

it to be sold.

n What is the reputation of the company selling 

the product to me? In addition to checking out the 

person selling the product, check out the factoring 

company’s record with the Better Business Bureau

and research the firm online and with a financial 

professional. 

n What are the tax consequences? Consult with 

a tax advisor about the possible tax implications 

of purchasing pension or structured settlement 

income-stream products.

n What organization is ultimately paying you? 

regardless of who is selling you the product, or the 

original recipient of the income stream, the ultimate 

source of payment is likely to be a pension fund 

(if you are purchasing a pension income stream) 

or an insurance company (if you are purchasing a 

structured settlement income stream). You will want

to check the financial stability of the organization, 

because if that entity goes bankrupt or becomes 

insolvent, it may stop paying the income stream. 

research an organization’s credit rating and 

company filings.

n Who is sending the check? In some cases, instead 

of receiving checks directly from the pension fund 

or insurance company, it has been reported that 

some pension sales arrangements allow for the 

pensioner to manually forward his or her checks to 

the investor. As a result, in addition to the risk the 

investment may be difficult to sell and the risk that 

the pension fund or insurance company’s financial 

position may deteriorate, investors are exposed to 

the risk that the original pension holder may refuse 

to forward checks to the buyer. You should make sure

that the contract spells out who will be responsible 

for sending you the payments. 

Whether you are thinking about selling a pension 

or structured settlement, or buying one from someone else, remember that the risks in doing so are 

substantial and the safety net if things go wrong may 

not be very strong. Don’t shy away from asking 

probing questions—and shop around. there may 

be less risky alternatives to help you achieve your 

financial objectives.

The Securities and Exchange Commission’s 

Office of Investor Education and Advocacy 

has provided this information as a service to 

investors. It is neither a legal interpretation nor 

a statement of SEC policy. If you have questions concerning the meaning or application 

of a particular law or rule, please consult with 

an attorney who specializes in securities law.

SEC Pub. No. 143 (5/13)