From the category archives:

Retirement

Is Securing a Personal Loan on Your Pension a Good Move?

by J. Hamilton Fraser on July 25, 2011

Securing debt by using your pension as collateral has become more popular in recent years – in particular for people who are approaching their retirement.

Older people often find that their pension is their largest asset. So if you anticipate receiving an ample pension in just a few years time, but you need some money now for home improvement or some other unexpected cost, taking a loan can seem like a good move.

Some lenders will allow you to borrow up to 50% the net value of your existing pension account, which could be a substantial amount and might serve a very important purpose.

Before you take out such a loan though, think carefully about the pros and cons:

Pros:

One obvious advatage is that this type of loan will be relatively easy and therefore perhaps faster to get – and it is likely to come with a lower interest rate too.

In fact, you may not even need to provide a credit check, so long as you can prove the value of your pension assets…

Cons:

The first thing to do is think about your own financial situation and whether you really need this loan. If you can reduce the principal at all, then so much the better.

This loan will effectively reduce your pension income when you do retire, so you should carefully consider what you need to live on and where you can save money in order to boost your own finances.

Remember that once you retire you will have fewer expenses to account for and it should be possible to save money in other places if have the time to look around for special offers and freebies. They all help.

How to apply

If you decide that you do need to take out such a loan, you should first check that you qualify. Many lenders will only offer such a loan if you are within 5 years of retirement.

Even at this age, some lenders may be wary of allowing this type of loan, so it is worth shopping around and asking questions. You might also need to take out life insurance to cover the term of the loan.

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