A pension loan could help you escape the millstone of unsustainable debt, or raise capital for your venture
Description: A pension loan can help you raise funds in an era of risk-averse lending. Here’s what you need to know to decide whether it’s right for you.
It used to be that the only way you could legally get at the money in your pension was to retire or die. Happily, though, there is now such a thing as a pension loan. But before you rush out to borrow from your pension, please read this article very carefully. There are good ways to borrow from your pension, and bad ways. Your future financial wellbeing depends on which one you choose.
What Are Pension Loans?
Pension loan schemes are a way of unlocking some of your pension for use today. Take a quick look online and you’ll see that they’re often thought of as a bad idea, but this needn’t necessarily be the case. There are certain circumstances in which pension loans can be your way out of a financially draining situation, or provide an injection of cash for your business. The key is to get good financial advice which takes your situation into account before deciding whether a pension loan is the right choice for you.
How Does A Pension Loan Work?
The first thing I found was that if I cash in my pension, I’m not actually borrowing anything. Instead, you’re setting up a kind of trust called a SSAS, which enables you to withdraw the cash you need without signing a credit agreement. This fund is under your control, which also means that you can still keep an eye on the business of providing for your future.
Who Can Benefit From A Pension Loan?
Typically, pension loans are a good solution for people struggling to service heavy levels of credit card or other debt. If, like Alan Adler, you’re just about managing to meet monthly interest payments from your income, it makes sense to turn to a pension loan scheme to free you once and for all. This is because even low-interest credit cards have an APR of around 16%, and your pension fund won’t grow at anywhere near this rate.
Another group of people who’ve started using pension loans to release much-needed capital is entrepreneurs. With traditional lenders taking a cautious attitude to risk after the recent financial crisis, pension loans have become a popular fundraising option, together with other novel approaches like crowdfunding. One huge benefit of the pension loan solution is that borrowers won’t end up being pursued by lenders or crippled by hefty charges if their venture doesn’t succeed.
What Are The Risks?
Of course, this method of releasing cash from your pension is not completely risk-free. Like other pensions, a SSAS is an investment fund, and every investment carries risks. If your portfolio doesn’t perform, your pension pot will be affected. There’s also no guarantee that future laws or regulation won’t make the SSAS a less viable option.
There are other, more avoidable risks. Companies exist which offer you a pension loan, but won’t allow you to set up and take control of your SSAS. Instead, they’ll spirit your funds away and ‘invest’ them in dubious schemes of their choice. You could be left with no pension pot and a massive tax bill from HMRC, even if you can prove that you were conned.
So What’s The Best Way Forward?
If you think a pension loan is the best way forward for you, you must get good pension advice from a reputable company. On no account should you accept an offer from an advisor who cold-calls you. Make sure the company you’re thinking of doing business with understands your situation and takes your circumstances into account. And never sign off on any arrangement you don’t fully understand.
Pension loans can be a legal, flexible way of unlocking cash from your pension, but only if you take the right approach. The potential risks of setting up a SSASS can easily outweigh the benefits, so it’s very important to make sure that this is the best option for you. But if you do your homework and get impartial advice, you could be looking at a welcome injection of cash well before you retire.