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Can your retirement annuity be used as collateral for a loan?

By Isabelle Coetzee

In order to take out a loan you need to ensure you have a good credit score and a steady income. But what else could you do to improve your chances of being approved?

If you have a retirement annuity, you may have wondered whether you can use this as collateral when you take out a loan. We decided to do the leg work and find out whether this is possible or not.

Secured loans versus unsecured loans

It’s important to first distinguish between secured and unsecured loans. The former refers to loans which are tied to a specific asset, such as a home loan or car loan. And the latter refers to loans which are not tied to an asset, such as personal loans.

Retirement as collateral for personal loans?

According to Brett Nadasen, operations manager at Finfind, personal loans are structured as unsecured loans, so collateral in any form should not be required.

If you’re looking for a flexible loan that’s not tied to an asset, then a personal loan is the right choice for you. Also, creditors can’t confiscate an asset from you if you default on your loan.

“The result will be a slightly higher interest rate on a personal loan, but without the risk of assets being lost in the event of default,” says Nadasen.

If you would like to apply for a personal loan, click here

Retirement as collateral for home loans?

Since home loans are considered secured loans, it may seem as though your retirement annuity can be used as collateral. However, this isn’t the case.

Nadasen points out that according to the Person Fund Act, a retirement annuity can’t be used as collateral.

However, he adds that in the case of a company retirement fund, depending on what the employee earns, there are pension-backed home loans.

But he emphasises that this is dependent on your particular fund and it’s best to contact your provider to find out what your options are.

If you'd like to apply for a home loan, click here

Why can’t retirement funds be used as collateral?

Imagine a world in which you’re able to use your retirement annuity as collateral for a loan. You decide to start your own business and if it fails, your retirement savings will cover the cost of the loan.

“The pros are a loan can be granted and funding accessed. The cons are the business fails and an individual loses the pension fund and isn’t able to comfortably retire. The cons are a lot more likely in this economy,” says Nadasen.

He adds that he would not recommend doing this, especially if the individual is older than 30.

“Should that money be lost, there just aren’t enough years left for a person to build up their pension to a sufficient amount required for retirement,” says Nadasen. 

If you'd like to apply for a retirement annuity, click here

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