There is a growing danger that threatens the financial security
of retirees who should have been relatively insulated from the
market setbacks of recent years: people with defined-benefit
Unlike people in
and other defined-contribution vehicles, people with
defined-benefit pensions don't see their retirement benefits bounce
up and down with the market. Instead, their benefits are guaranteed
by their former employers. With the corporate community having
largely abandoned defined-benefit pensions, it is often government
employees, including military personnel, who are still covered by
The threat comes in the form of pension advance loans, which
often employ predatory terms that can greatly reduce the value of a
What are pension advance loans?
Pension advance loans provide an upfront amount in exchange for
payment from the retiree's future pension benefits. While that may
make sense in some situations, one general problem is that it feeds
common tendency of Americans to overspend
now at the expense of their financial futures.
What's worse is that pension advance loans often charge
exorbitant interest rates. While today's mortgage rates are down
around 3.5 percent and bank rates on deposits are even lower, an
investigation by The New York Times
found that after factoring in all costs, the pension advance loans
surveyed charged effective interest rates between 27 and 106
At that cost, pension advance loans are not just a case of
sacrificing the future for the sake of the present -- they are
pretty much like throwing money away.
What to consider before you take out a pension
Here are five things to consider before you agree to a pension
What will happen to your financial needs as you
Unless you have reason to believe your expenses will be
considerably lower in the future than they are now, you should
not give up future benefits for the sake of current
Are you borrowing for short-term or long-term
This is the difference between using money for something that
will benefit your for years to come, or splurging on something
you may regret for years to come.
What is the effective interest rate?
Calculate how much you'll have to pay in the form of future
benefits compared to how much you'll get now. At a time when even
high-yield savings accounts
are only paying about 1 percent, and even most credit card rates
are in the teens, paying 20 percent or more for a pension advance
loan is hard to justify.
Did you plan on leaving an inheritance?
As people age, they start to think not just about their own
future, but about future generations. If you had planned to leave
any money behind, hanging onto your retirement benefits rather
than borrowing against them may by your last chance to accumulate
Can you plot another course before it's too
People often resort to pension advance loans because they are in
a bind. Before you get into that situation, work on maintaining a
lifestyle that your benefits can afford.
By charging excessively high interest rates, pension advance
loans can effectively rob retirees of a portion of their benefits.
The worst part is that by signing on to those loans, retirees are
active accomplices in that robbery.