Ask Money

The skinny on secondary market annuities

Chris Farrell Feb 10, 2012

Question: I am retired and would like to safely increase income. What is a secondary market annuity? Is it a suitable vehicle for putting a portion of retirement funds to safely increase guaranteed retirement income? Are there issues to be aware of with the secondary market annuities? How should this product be purchased? Thanking you in advance for any light you can shine on this topic. Ronald, Rhinebeck, NY 

Answer: Like so many retirees earning next to nothing on their fixed-income investment, you’d like to “safely increase guaranteed retirement income.” Secondary market annuities — also known as factored structured settlements — offer lush yields in comparison to safe Treasuries, CDs and the like. But it isn’t a product that will “safely increase guaranteed retirement income.” My bottom line: Steer clear of the product.  

The time-honored insight holds: A higher yield means greater risks. I don’t see anything “safe” about a secondary market annuity for the average retiree. 

These securities come at the end of a long daisy chain. Stripped down, the basic process essentially runs along these lines. Someone wins a wrongful death or injury lawsuit. The settlement is paid out through an annuity. Howeverhe beneficiaries need income now. They sell the annuity and its income at a big discount to a specialty company called a factoring firm. The factoring firm, in turn, transforms the stream of income into a packaged security. The security is sold by brokers to individual investors.

I think you can see that it’s a market for genuinely sophisticated investors with both the means and the insight to diligently research the underlying product. 

Jason Zweig, the savvy investment columnist for the Wall Street Journal, offer a typically smart overview of the investment here.   

But as is so often the case when investments are promoted on the basis of high yield, these deals are unsuitable for most investors. Even in the rare situations when they might make sense, you must proceed with extraordinary caution.

The title of his article sums up well why most retirees and average individual investors should stay away from secondary market annuities: Another Can’t-Miss Deal That Can Miss Spectacularly.

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