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.
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.