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 have 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.
- Pension loans are unregulated in the United States.
- Lump-sum loans as an advance on your pension may result in unfair payment plans.
- The Consumer Financial Protection Bureau (CFPB) warns customers of taking out loans against their pensions.
- Most pension plans are protected if you are forced to file for bankruptcy.
- If you need money, seek alternatives solutions rather than borrowing against your pension.
How Pension Loans Work
A hypothetical scenario might go something like this: You’re a 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.
After you complete the paperwork, you learn that you have signed over five to 10 years—or all—of your pension payments to the company. Then you learn that the interest rate on the loan is upwards of 100% after all the fees. You also find yourself in a higher tax bracket for the year because the payment came as a lump sum. The above 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 veteran's benefits.
Alternatives to Borrowing Against Your Pension
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. The annual percentage rate (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. 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, you can consider bankruptcy. In most cases, your pension is safe if you file for bankruptcy. Even if you’re in a panic because of mounting bills, don’t sign away the source of income that you will need to live on going forward. Nearly every other financial option is better than a pension advance loan. There are reasons that the Federal Trade Commission (FTC), Consumer Financial Protection Bureau, and personal finance experts advise staying away from these loans.