pension backed loan

Can I take a loan against my pension fund?

Pension or provident fund pay-outs are typically accessible after resignation, retrenchment, retirement, dismissal, or as part of a divorce settlement. Sometimes it is necessary to access funds quicker than the fund administrators pay it out and under certain circumstances, you can apply for a loan against the value of the fund.

The ability to take out a loan against the value of your pension fund can be done in one of two ways.

Loan directly from your fund

If the rules of your pension fund allow for members to take out loans, then a loan can be applied for directly from the administrators of your fund. As with any loan, be it against an asset like your pension fund, an unsecured loan, or any other loan for that matter, always read the fine print and be aware of the interest rate, charges and costs involved. It is also especially important to confirm that the company offering the loan is a registered financial service provider in good standing.

Use this link to independently confirm the status of the financial service provider.

Pay special attention to the specific terms that deal with a default on the loan repayment.

Banks or other institutions offering pension backed loans

You can apply for a loan from a bank or private lender where your pension fund is used as security for the loan. There are companies which offer pension bridging loans as a speciality product. Be very vigilant when signing any loan agreement, know the costs and fees involved and be sure that you understand the real implication in terms of a Rand Value, and, in particular the terms in relation to a default.

This type of loan is most often in the form of a bridging loan and can be against either a pension fund or a provident fund. The situations where you would typically use a bridging loan would be:

1. You have retired and need cash before your fund pays out.
2. When a family member dies, and you need cash to pay off debts or for funeral costs.
3. If you are a beneficiary of a deceased estate.
4. A court has awarded you a portion of your spouse’s pension/provident fund/RA and you need cash sooner.
5. If you have an annuity/endowment which is maturing within 6 months, you can generally apply for a loan against the value.
6. If you have fixed term savings accounts that are maturing in 4-6 months.

Fees associated with bridging loans against your pension fund/provident fund.

Pension backed loan costs

1. APR: This is the annual interest rate.
For example, if you loan R100 000 over 6 months and paid back the loan in one payment at the end of the 6 month period.

Loan Financed: R100,000
Upfront Out-of-Pocket Fees: not included in this calculation (see below)
Total of 1 Payments: R114,842.52
Total Interest: R14,842.52

2. Initiation fee: This is a fee the company charges for administrative purposes and can vary substantially from lender to lender so be sure to get more than one quote if you are going to go this route.

3. Service fee: There will be a further fee for service administration.

Use the following calculators to help you determine the actual cost of any loan.

Calculate costs on loans

There are other ways of utilising the value you have accumulated in your pension fund to access finance. For example, if you have a significant amount accumulated in your pension fund and need a home loan, there is such a thing as a pension backed home loan.

Consolidate your debt

Many people have asked for loans against their pension funds or provident funds in order to settle debts. There is an alernative to taking a loan against your long term savings for retirement, and that is to consolidate your debt into a single loan with a favourable interest rate over a period that makes repayments affordable.

You may have some short term debt that needs attention right away, or some medium term debt like car finance in the mix. By consolidating your debt, you take all of your debt, calculate a total and get a single loan which allows you to pay off all of the smaller amounts and then make a single payment.

This is an incredible option that a person who has experienced the pressure of being in too much debt feels like. If you are committed to getting out of debt, then debt consolidation should be considered.

The first option is to use any equity you have in a property that has accessible funds in an “access bond” The bond interest rates are the lowest they have ever been in SA. If you do not have a bond with an access facility, speak to your bank about the consolidation loan products they have available.

If you have changed jobs and were contributing to a pension/porovident fund, you may have unclaimed benefits owing to you. See if you have any unclaimed benefits.

Try not to touch your retirement savings, you are going to need it.