You’ve probably heard of asking for an advance on your paycheck. But what if you could get an advance on your retirement savings?

If that savings is in the form of a pension, you may be able to take a loan against it. Even if it is an option, though, you need to decide if it’s a wise move. In many cases, there are better alternatives available. First, you need to determine whether you should take a pension loan in the first place. Only then can you decide how to get a pension loan.

We’ll break it down for you to help you decide what your next move should be.

How pension loans work

Borrowing against your pension fund can seem like a great idea. If, for instance, you have $25,000 in credit card debt, tapping into your retirement savings may seem like a way to get ahead of your bills. But to do so, you’re only shifting your debt elsewhere, and you may have to repay the loan at a quicker rate than works for your budget.

Loans for pensioners vary from one plan to another. Rutgers University offers up to two loans per calendar year to active employees, for instance. The State of New Jersey sometimes allows employees to apply for loans of up to 50 percent of their total pension contributions. In both cases, you’ll apply and, if approved, make regular payments of the amount, plus interest, according to the terms of the loan.

Eligibility

The biggest eligibility factor you’ll find, when you ask, “Can I take a loan on my pension fund?” is that you have money in the account in the first place. You’ll likely be required to have a specific balance, as well as being actively employed by the company sponsoring the pension plan. Former employees are usually excluded.

In addition to your account balance, your eligibility will also typically be based on your years of service with the company. Many plans will require you be an employee for a minimum number of years before you’ll qualify.

Loan Limits

If you’re asking, “Can I secure a loan against my pension?” you’ll need to know exactly how much you can expect to borrow with such a loan. Typically, it will depend on your account balance. It will likely be a percentage, along with a limit. Rutgers employees can take up to half of the amount in the account, with an upper limit of $50,000.

But it’s important to remember you’ll have to repay this amount. Requesting more than you need can cost you in the long run, as you’ll have to pay it back with interest. You’ll also lose out on any interest or potential growth you would have earned on that pension amount during the loan’s duration.

Repaying the Loan

Before you sign on the dotted line, pay very close attention to the payment terms. How often will you need to make payments? What will the interest rate be? If you can, determine what your payments will be before you commit to a loan that you’ll be paying on for years.

Speaking of years, when you ask, “Can I borrow against my pension?” be aware that the longest repayment period the IRS allows is five years. That means in five years or less, you’ll need to have the loan amount plus interest back in your account to avoid a taxable event. If you’re taking the loan due to your current financial situation, and those circumstances don’t improve within that short time, you may find that you’re in even further dire straits.

Hardship Distributions

Instead of asking, “Can I borrow from my pension plan?” instead think about withdrawing the funds. Some plans can allow hardship distributions, which means you may be able to take the amount out without penalty. Check into any retirement savings accounts you have to determine if this is an option.

With a hardship distribution, you’ll be receiving a payout instead of a loan. To qualify, though, the distribution must be due to an immediate and financial need. You also can only remove the amount necessary to resolve the hardship.

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Alternatives for Raising Money

Before you take a loan against your retirement savings, consider some alternatives. If you own a home, you could consider using some of your equity via a home equity line of credit (HELOC). Interest rates on HELOCs are far more favorable than credit card rates and the loan interest on HELOCs is tax deductible. If home equity is not an option, you should stop at your bank. Ask about personal loan options or a line of credit that might be available to you as an account holder. If you have no luck there, consider other local banks and credit unions, then online banks that may be willing to issue a loan.

If you’re a veteran, you may qualify to take a VA loan, using your pension as collateral. Many pension holders are public employees who have access to a credit union as an employee perk. If you haven’t already, stop by that credit union to see your loan options.

Bottom Line

Your retirement savings account is an important part of preparing for the future. Before you make any financial decisions, we recommend speaking to a Certified Financial Planner® who can advise you on the best course of action for you. In some cases, this may mean a loan against your pension, but often there are better alternatives.

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