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What Are the Pros and Cons of Cashing in a Pension?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 06 October 2018
  • Copyright Protected:
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    Conjecture Corporation
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Cashing in pensions is sometimes necessary in order to deal with life circumstances that require immediate attention. While cashing in a pension may help deal with pressing financial matters and alleviate a lot of stress on the individual, there are also several drawbacks to this approach that must be taken into consideration. Before making the decision to cash in a pension, care must be taken to weigh the good with the bad and determine whether the option is in the best interests of the individual in the long run.

One immediate benefit of cashing in a pension is the ability to make use of that lump sum payment to settle outstanding debts. This means that if the individual has experienced a long period of unemployment or has accumulated a number of medical expenses due to an extended illness, the proceeds from the pension fund may be used to settle those debts and possibly manage other expenses, such as a mortgage payment. In catastrophic situations, the money generated by cashing in a pension may be the only means of averting an impending financial disaster and effectively allowing the individual to dismiss those debts and start over with a clean slate.

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Along with the ability to settle debt and enjoy a new start, cashing in a pension does present several drawbacks. Depending on the structure of the pension plan, taxes may be due on the total amount received. This can reduce the amount remaining to manage pressing expenses. In addition, lump sums of money placed into the hands of people who are less than financially responsible could mean that all the money is gone in short order, with little to nothing to show for the effort. The end result could be that all the pressing expenses are still pressing since the money was spent on other purchases, and there is also no nest egg for the retirement years.

Unless there are financial situations that cannot be managed in some other manner, cashing in a pension should be the last consideration. While the approach can mean paying off a great deal of debt and alleviating a lot of stress, the strategy may create a whole new set of issues that must be addressed at one time or another. Before making the decision to cash in a pension early, talk with a financial planner and see if there is some other approach that would make it possible to restore financial stability without touching the pension fund.

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Fa5t3r
Post 3

@umbra21 - There are no guarantees when it comes to this kind of thing. Everyone has to weigh up the pros and cons of their own financial situation.

If you don't have any financial experience yourself, I would ask someone without a stake in your money for their expert advice. Don't ask anyone who stands to benefit from your decision, one way or the other, and get a second opinion if you need to. Also, don't just take family advice, unless they are qualified to give it.

Too many people end up getting scammed out of their money when they are nearly retirement and that's a very tragic situation. If you're thinking of cashing in your pension early for any reason, make sure you have the approval of someone who absolutely knows what they are doing.

umbra21
Post 2

@pleonasm - I think it's good that it's difficult for people to contemplate, because it should be a hard decision. The fact is that it's not always about weighing amounts of money against each other. A pension is a safety guard that can exist outside of everyday finances. Once it's gone, it's gone forever.

I think sometimes it's better to just work harder and pay off the extra debt just to keep something safe that you know will guarantee your future.

pleonasm
Post 1

It might be difficult to contemplate, but you could actually be saving money in the long run by cashing in a pension to pay off a debt. The amount of interest that gets charged on some kinds of debt is enormous and can quickly scale out of control. You end up paying back twice as much as you borrowed, or even more.

Cashing in a pension will usually result in less money from the pension but the difference between that and how much you might spend on interest for your debt in the meantime might be significant.

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