This is the worlds leading source of financial content on the web, ranging from market news to retirement strategies, investing education to insights from advisors.
Forex Forever!

Can I Get A Loan Against My Pension?

Author: Andrew Jackson

If you have an asset, you can probably get a loan against it. Your paycheck, your tax return, your home, your 401(k) and, yes, even your pension if you're one of the relatively few people who still has one.

If you've never heard of a pension advance, consider yourself lucky. They're also called pension sales, loans or buyouts. Whatever the name, personal finance experts and government agencies advise steering clear of these products.

How They Work

A hypothetical scenario might go something like this:

You're 65-year-old retired government employee. You receive a monthly payment from your pension, but recently you've fallen on hard times. You need more money than your retirement benefits pay each month to pay one-time bills. The sum you need is substantial so you start looking around for ways to raise cash. You run across an online ad that offers a lump-sum advance on your pension payments.

When you contact the company, you have a hard time pinning down information about the loan, but you need the money badly so you go ahead. After you complete the paperwork, you learn that you have signed over 5 to 10 years – or all – your pension payments to the company. (Sometimes people are forced to direct their pension payments to a different bank account attached to the company and purchase a life insurance policy with the pension advance company named as the beneficiary in case they pass away, according to the Consumer Financial Protection Bureau)

Then you learn that the interest rate on the loan is upwards of 100% after all the fees, and you find yourself in a higher tax bracket for the year because the payment came as a lump sum.

This scenario may be hypothetical, but it's very real in the lives of many retirees. Consumer advocacy groups advise finding other options if you need money fast.

If you're receiving a military pension, definitely stay away: It is illegal for any loan company to take a military pension or veterans' benefits.

Money-Raising Alternatives

If you find yourself in a financial bind, don't get a pension advance loan. Try everything else first. Ask your bank or credit union if you are eligible for a short-term loan. Check with your credit card company about a cash advance (see How A Cash Advance Works). The APR on a cash advance from your credit card is high, but by any standards it's better than the terms on a pension advance loan. If you own your home, consider a home-equity loan or reverse mortgage (start by reading Reverse Mortgage Or Home-Equity Loan?).

If you are not eligible for any other loan type, contact your creditors and tell them that you're unable to pay and would like to negotiate a payment plan. This is a good time to contact a credit counseling agency. As a last resort, consider bankruptcy. In most cases your pension is safe if you file for bankruptcy. To understand more about this decision and its implications, read When To Declare Bankruptcy.

The Bottom Line

Even if you're in a panic because of mounting bills, don't sign away the of income that you will need to live on going forward. Nearly every other financial option is better than a pension advance loan. There's a reason the Federal Trade Commission and the Consumer Financial Protection Bureau, as well as personal finance experts, advise staying away from these loans.

last five articles

#121 Disability Rider on Life Insurance: Should You Buy?

Author: Ethan Davis

When buying a life insurance policy does it make sense to also pay for a rider that waives the premium payment if you become disabled? According to the American Council of Life Insurers the majority of individual life insurance policies in force include a rider that waives the premium upon total... see more

#1180 5 Things To Do in Disney Parks on a Budget

Author: Christopher Smith

Walt Disney first thought of opening an amusement park in the late 1930s; it was originally planned to be in Burbank, near the company's offices, and was intended for employees and their families. It took him many years to raise the money, much of it coming via the television show he made for ABC... see more

#414 Sending Money: MoneyGram vs. Western Union (WU, MGI)

Author: Daniel Taylor

In this world of ubiquitous ATMs, tap-to-pay checkout and automated bank deposits, there are still times when it's necessary to hand over, or collect, hard cash. That's why money-transfer services Western Union and MoneyGram have tens of thousands of agents in cities and towns around the world. ... see more

#490 6 Good Reasons To Get Renter's Insurance

Author: Jacob Taylor

If you're renting an apartment or home, you'll need an insurance policy to cover your belongings. Your landlord's property insurance policy covers losses to the building itself – whether it's an apartment, a house or a duplex. Your personal property and certain liabilities, however, are covered... see more

#1812 5 Good Habits Every Entrepreneur Needs

Author: Daniel Smith

An entrepreneur organizes and manages an enterprise such as a business, normally taking on a large amount of risk in the process. In essence, an entrepreneur creates a company or other type of organization that directly employs other people and organizes them toward the achievement of a common go... see more