Can I Sell My Pension? Possibly, but You Probably Shouldn’t
If you are the lucky owner of a pension plan that provides you with regular payments during retirement, you have probably been bombarded with ads offering you large lumps sums to “release” or “cash out” your pension. Maybe you’re even considering one of those offers.
Before you make this decision, though, take the time to make sure you understand how the process actually works and how it could affect your retirement in the long term.
So can I sell my pension?
It depends on your pension.
Not all pensions can be legally sold. If you have a federal pension, for example, it’s likely that you are not allowed to sell it. Sometimes, the companies that are offering you cash for your pension will tell you that they can get around laws that prohibit cashing out federal pensions. It hardly seems worth saying that this isn’t a good idea.
If you don’t have a federal pension, it’s likely that you could cash out some or all of your future pension payments. Keep in mind, however, that the amount that you’re being offered is probably far less than you would receive if you just took the pension payments over the years.
Why would I sell my pension?
Despite the fact that selling your pension almost always means less money in your pocket in the long run, many people choose to do it anyway. Often, they are in desperate need of a large sum of cash to pay for things like medical expenses, job loss, and other difficult situations.
What people who are planning to sell their pension benefits don’t realize, however, is that there are often other options. When you look at the amount of money that you stand to lose by cashing out your pension payments, it’s often a better financial decision to look into things like traditional loans, home equity lines of credit, or maybe even taking a loan from your 401k if you have to. Making lifestyle changes like moving to a cheaper living situation can make quite an impact as well.
If you absolutely cannot receive the money any other way, consider selling only part of your pension instead of the whole thing. Think about the smallest amount of money you’ll need to help you get back on your feet and don’t take more than that.
What can go wrong?
The hard truth is that selling your pension payments for cash is usually not the best idea. The fact that your lump sum payment will be less than the combined payments you’re giving up means that the math just isn’t on your side.
The ramifications are quite simple. By cashing out your pension you are essentially taking a very expensive loan from your future self, possibly more expensive than necessary. Sure you may have the money you need now, but you’re going to have to pay for that privilege later when you are no longer receiving the regular pension checks that would have sustained you in retirement.
Does this ever work out well?
Like anything, there are times when cashing out your pension might make more sense.
If you absolutely don’t have a cheaper means of accessing funds and you can’t put off whatever it is you need to pay for, it’s obviously better to sell the pension and count your blessings that you were able to get the funds from somewhere.
In an ideal world, if you absolutely had to sell a portion of your pension payments, the lump sum would go towards something that would improve your financial situation in the long term. Maybe you take a hit by cashing out your pension, for instance, but the money allows you to get the medical attention you need in order to go back to work.
How do I know if I’m being scammed?
A surprising number of the companies that are in the business of paying you for your future pension payments aren’t as upstanding and honest as you’d hope. It’s important that you thoroughly research the company you’re considering selling to.
If in doubt, it might be a good idea to pull a financial advisor or financial planner into this decision. They can help you make sure that you don’t have other cheaper options for accessing the money you need. They could also help you determine if you are getting the best deal possible if you do need to cash out some of your pension. Attorneys that specialize in pension law are also an asset and can look over any paperwork before you sign.
If you’re thinking about selling your pension, it’s likely you’ve hit a few financial bumps lately. Keep in mind that this happens to almost everyone at some point. The key is to try to consider your options in a rational way that takes into account not only your current needs, but your future needs as well.
Remember that you almost always have more options than you think you do.
If you haven’t been in touch with your financial planner or advisor it might be a good time to reach out to that person. Or, if you don’t have a financial planner or advisor, you might consider finding one in your area who can help you work through your situation.
David Wilson is a Certified Financial Planner® and Accredited Investment Fiduciary Analyst® at Vector Financial Solutions and the author of this blog. He has spent the last 30 years helping people in the greater San Diego area accomplish their financial goals and envision their best financial future. Call 760-741-3159 or email to get touch.
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David Wilson, writer at Financial Truths, is also a financial advisor and Certified Financial Planner® and Accredited Investment Fiduciary Analyst® at Vector Financial Solutions, Inc. Vector Financial Solutions is located at 139 E. 3rd Ave., Escondido, CA 92025 and by phone at 760-741-3159.