How to Borrow Against Your Pension [and Best Alternatives]

Retirement is a dream for many, but it can also come with unexpected expenses. If you’re fortunate enough to have a pension, it’s possible to leverage it to get a loan if you need additional income. However, loans for pensioners are controversial. Many pension loans come with high fees and serious risks, which can jeopardize your retirement.

We’ll explain how a pension loan works and predatory practices to watch out for. We’ll also share several pension loan alternatives to consider that are more common and less risky. In sum, pension loans exist, but so do better borrowing options.

Table of Contents

1. Can you borrow against your pension?
2. How does a pension loan work?
3. When borrowing against your pension may be an option
4. Risks
5. 4 alternatives
6. How to protect yourself if you’re considering a pension loan
7. FAQ

Can you borrow against your pension?

Yes, you can borrow against your pension, but few lenders offer pension loans in the United States. The Federal Trade Commission (FTC) and other government entities, like the North Carolina Department of Justice, warn against pension loans. That’s because most pension loan companies will ask you to sign over a portion of your future pension in exchange for a lump sum, and the interest can be 50% to 100%.

Veterans are especially susceptible to predatory lending practices. Federal law prevents veterans from giving access to benefits like pensions to outside entities. However, predatory lenders use a loophole by calling their products a “pension advance,” not a loan. 

In January 2024, the Consumer Financial Protection Bureau sent $6 million to veterans who were victims of companies that offered predatory pension loans and other products. In sum, while it seems like a pension loan would enable you to get much-needed cash upfront, there are significant fees and downsides.

Can I use my pension as collateral for a loan?

Some lenders allow you to use your pension funds as collateral for a loan, but it is quite uncommon. Whether you can use it as collateral will depend on your lender. However, since you can lose collateral if you don’t make loan payments on time, it’s not wise to use your future retirement as collateral.

How does a pension loan work?

Here is what you need to know about pension loans, how they work, and why you should consider alternatives. 

What is a pension loan?

A pension loan, also called a pension advance, is when you take out a loan and get a lump sum in exchange for giving a lender a portion of your pension payments in the future. These loans were more available several years ago, but the CFPB filed a lawsuit against companies Pension Funding LLC and Pension Income LLC because they deceived customers. 

Factors to consider

Sometimes, individual employers, such as government or educational entities, will offer pension loans if you meet certain qualifications. For example, the New Jersey Institute of Technology offers pension loans to qualifying employees. 

Unlike the abusive pension loans we mentioned, the New Jersey State Treasurer sets appropriate interest rates annually for the NJIT pension loans. These loans have a maximum five-year repayment and a maximum deduction of 25% of an employee’s base salary.

Before taking out a loan against your pension or using your pension as collateral for a loan or line of credit, make sure you understand the following:

• Repayment terms: Ask your lender exactly how much you’ll owe, your monthly payments, and the duration of your term. 
• Interest rates: Know your interest rate and whether it’s fixed or variable.
• Fees: Read your terms and conditions to determine what fees your lender charges. Double-check with your lender to ensure you know all fees before signing.
• Tax implications: Speak with a licensed accountant or Certified Financial Planner® to find out whether getting a pension loan affects your taxes now and in the future. 

When borrowing against your pension may be an option

Generally, a pension loan is a last resort for emergencies, like avoiding foreclosure so you can keep your home. Another emergency would be having no other options except for a pension loan to avoid bankruptcy, which could hurt your credit for seven years and prevent you from accessing credit for a period of time.

If you have an urgent medical emergency and feel like a pension loan is your only option, research alternatives, such as working with the hospital on a financing plan. Consider getting help from a family member or friend or to tap into the equity in your house instead.

Risks of borrowing against your pension

Here are the main risks to consider when borrowing against your pension.

❌ Long-term financial security risks

Data analysis from the National Council on Aging (NCOA) and the LeadingAge LTSS Center at UMass Boston revealed that 80% of households with older adults are financially struggling, a trend researchers found will worsen as people age. The study showed that contrary to popular belief, millions face financial insecurity during retirement. 

While it may seem like getting a pension advance is a way to help pay for expenses, the reality is that borrowing against your pension could increase the possibility of financial issues as you age. If you agree to send a portion of your pension to a lender, that’s less cash flow you have to live on in retirement. 

If you don’t have additional retirement savings or other income streams, it could be challenging to afford expenses as you age.

❌ Predatory lending concerns

Unsavory lenders target seniors with pensions, especially those with military or government pensions. They could use aggressive tactics to pressure you into signing an agreement and then charge you astronomical interest rates.

Before taking out a loan with a lender, be sure to research the company, including whether it’s registered with the Better Business Bureau, and read through customer reviews.

❌ Legal and tax implications

As we mentioned, legal and tax implications could apply to borrowing against your pension, including early withdrawal penalties and other issues. A tax professional can help you decide whether this is a viable option for you.

❌ Risk of defaulting

If you can’t repay your loan, your lender may sue you, creating more expenses and stress in your life. Defaulting on your loan also has serious credit implications and could prevent you from borrowing money in the future.

4 alternatives to borrowing against your pension

Before borrowing against your pension, consider all possible alternatives first. Many other lending products may be available to you with better terms and interest rates. Here are several examples of other lending options to consider, from leveraging your home equity to taking advantage of assistance programs.

1. Personal loans for pensioners

If you’re hesitant to borrow against your pension, a personal loan can be a flexible alternative. These loans don’t require collateral, and you can use them for various purposes, from covering emergency expenses to consolidating debt. Visit our guide to the best personal loans for more.

For a simple way to compare options, Credible offers an online marketplace where you can check prequalified rates from multiple lenders without affecting your credit score. This streamlined approach helps you find the best personal loan based on your financial profile. Credible caters to borrowers with a range of credit scores, making it a convenient option for pensioners.

2. Home equity loans or HELOCs

For homeowners, borrowing against your home equity is often a more cost-effective solution than using your pension. Home equity loans provide a lump sum with fixed interest rates, and home equity lines of credit (HELOCs) allow flexible access to funds as needed. Check out our detailed guides to the highest-rated HELOCs and the best home equity loans.

If a HELOC sounds appealing, Figure is our top-rated provider. Its online application process can get you approved in minutes and funded in as little as five days. Figure offers fixed-rate HELOCs with no annual fees and draws up to 100% of your funds, making it an excellent option for those seeking fast, reliable financing.

3. Retirement account loans

If you have a 401(k), you may be able to borrow from it, depending on your employer’s policies. Before taking out a 401(k) loan, make sure to understand the terms, like what happens if you lose your job or the tax implications if you don’t pay it back in full. To see whether this option is available at work, speak with your Human Resources department.

4. Assistance programs

Several government programs and nonprofits are geared toward helping seniors. These programs can help with the cost of food, healthcare, energy bills, and more. Here are several resources that you could use to help afford basic necessities, which can help improve your overall cash flow and savings:

• Low Income Home Energy Assistance Program (LIHEAP): If you need help affording expensive energy bills or home repairs related to energy costs, this program can help you.
• Supplemental Security Income Program (SSI): You could receive cash assistance if you qualify.
• SNAP/Food Stamps: Provides food for any low-income individual
• Senior Farmers’ Market Nutrition Program: Created specifically for seniors, you could get assistance purchasing fruit and vegetables.
• Medicare Savings Programs: Medicare programs help seniors pay for their vital healthcare needs.
• National Veterans Financial Resource Center (FINVET): This resource center helps veterans pay for essentials, manage debt, and increase their income.

A pension loan would likely be the last resort I would recommend for a client in financial distress. There are too many other potential ways to access capital you should explore before robbing your future retirement income security. I would weigh each potential option’s advantages and disadvantages to determine which best fits your needs with the least negative financial impact.

How to protect yourself if you’re considering a pension loan

If you’re considering getting a pension advance, the CFPB lists several tips and red flags to be aware of. The CFPB also points out that any company offering a pension advance to members of the military is fraudulent due to federal laws regarding military benefits. Here are some of the best ways to protect yourself against pension loan scams.

☑️ Research lenders

🚩 The CFPB advises consumers to beware of any lender that uses a patriotic name or patriotic logo; that’s one way companies try to attract military members to apply for a pension loan. 

🚩 Another red flag is if a company asks you to sign up for a life insurance policy to receive your pension loan. Companies do this so that if you pass away, the lender is the beneficiary of your life insurance policy. These life insurance policies often come with extra monthly fees that can be challenging to add to your monthly budget. 

🚩 The biggest red flag is if any company wants control of your monthly pension payments, especially if they want your pension payments to be direct deposited into an account the lender can access. You should be the only person who can receive and withdraw your own pension benefits. 

☑️ Consult professionals

Before you make a decision like promising a portion of your pension to a lender, consult a financial planner, accountant, or attorney. Search for someone who specifically helps retirees with retirement investments and tax planning.

Not only can one of these professionals help you determine whether or not a lender is legitimate, but they might also be able to guide you on better alternatives with lower fees and less risk.

Read the fine print

If you decide to borrow against your pension, read the fine print, and ask your lender as many questions as possible about the process. It’s crucial to ask about repayment terms, fees, and potential penalties. Then, run the numbers and calculate how taking out a pension advance will affect your income in retirement. 

Finally, ensure you’ve researched all other options and alternatives, including asking family for help, before applying for a pension loan.

FAQ

Can I borrow from my pension under 55?

In most cases, borrowing from your pension before age 55 is not allowed in the U.S. Pension plans are designed to support retirement. Accessing funds early typically comes with significant penalties and tax implications.

However, depending on the specific terms of your pension plan, some exceptions exist for hardships, such as medical emergencies or disability. It’s crucial to consult your plan administrator and financial advisor to understand your options and the potential long-term impact on your retirement savings.

Can you borrow from your pension to buy a house?

You generally can’t use your pension as collateral for a loan, but certain retirement accounts—a 401(k), for example—may allow loans for specific purposes, including buying a house. The funds borrowed are repaid to the account with interest, but strict limits apply, such as borrowing up to 50% of the account balance or $50,000, whichever is less.

If you’re considering this option, be aware of potential risks, such as reducing your retirement savings and incurring penalties if repayment terms are not met. Alternative options may offer a more sustainable way to finance a home purchase without jeopardizing your retirement.

Can I refinance a pension loan?

Refinancing a pension loan depends on the type of loan and the policies of the lender or pension plan administrator. Refinancing may be possible if the loan is through a private pension advance company, but you’ll need to evaluate the terms to ensure the new loan reduces your financial burden.

Refinancing isn’t an option for loans tied to retirement accounts, such as a 401(k). Instead, you may be required to repay the loan within the original terms. Consider speaking with a financial professional to explore alternatives.