Retirement is a time that many people look forward to after years of hard work. It’s a time to relax, travel, and enjoy the fruits of one’s labor. Unfortunately, many people find themselves struggling financially during retirement due to poor financial planning, unexpected expenses, and a lack of retirement savings. Some people consider taking out a loan using their pension/retirement money as collateral to help alleviate financial pressures. However, this is a risky financial decision that can have long-lasting consequences.

Sacrificing your Future

When you take out a loan using your pension/retirement as collateral, you’re essentially borrowing money against your future retirement income. This means that you’re borrowing money that you’ll need to live on when you retire. This can be a dangerous financial move because it means that you’re sacrificing your future financial security for short-term financial relief.

One of the biggest risks of taking out a loan using your pension/retirement money as collateral is that you may not be able to repay the loan. If you’re unable to repay the loan, your pension/retirement may be seized to pay off the debt. This could mean that you’ll have less money to live on during retirement, which could have a significant impact on your quality of life.

In addition, taking out a loan using your pension/retirement money as collateral can also have significant tax implications. If you default on the loan, you may be hit with significant tax penalties, which could further reduce your retirement income. This is because the IRS considers a loan against your pension/retirement to be a distribution of your retirement funds, which means that you may be subject to early withdrawal penalties.

Paying Higher Interests

Another risk of taking out a loan using your pension/retirement money as collateral is that you may end up paying a higher interest rate than you would with other types of loans. This is because loans against pension/retirements are considered to be high-risk loans, which means that lenders may charge higher interest rates to offset the risk. This could result in you paying significantly more in interest over the life of the loan.

Your credit score is affected

It’s also important to consider the impact that taking out a loan using your pension/retirement money as collateral could have on your credit score. If you default on the loan, your credit score could be negatively impacted, which could make it difficult to obtain credit in the future. This could make it more difficult to obtain credit for things like buying a home or a car, which could further impact your financial security.

Ultimately, taking out a loan using your pension/retirement money as collateral is a risky financial decision that should be avoided if at all possible. Instead, it’s important to explore other options for obtaining the funds that you need. This may include cutting back on expenses, taking on a part-time job, or selling assets that you no longer need.

If you do find yourself in a situation where you need to take out a loan using your pension/retirement money as collateral, it’s important to do so with caution. This means that you should only borrow the amount of money that you need, and that you should have a plan in place for repaying the loan as quickly as possible. It’s also important to carefully review the terms of the loan, including the interest rate and any fees or penalties associated with the loan.

EPF Members allowed to take a maximum of RM50,000 personal loan against their savings in EPF Account 2

As recently as 7 April 2023 in Malaysia, the government has announced its decision to allow its largest retirement fund members (Employees Provident Fund aka EPF) to take a maximum of RM50,000 personal loan against their savings in account 2. The main reason for the government’s move is that many of EPF’s members are still reeling from the effects of the worldwide Covid-19 pandemic, some of them are struggling with the high inflation, and the rising cost of living is also causing a lot of Malaysians to feel the heat financially.

Hence, in order to help combat all these financial problems, a number of Malaysians are hoping for another round of EPF withdrawals as a form of cash assistance to help them ride out this wave of financial uncertainties.

Here are the details the of the EPF collateral scheme:

Who can apply

  • * Phase 1 starting April 7, 2023 will be open for 1 year to members aged 40 and above but below age 55
  • * Phase 2 for those below 40 will be announced at a later date
  • * Members must have at least RM3,000 in Account 2 to be eligible

How this facility works

  • * Maximum financing limit is RM50,000 (but subject to individual balance in Account 2)
  • * Repayment tenure is up to 10 years
  • * Financing rates will range from 4% to 5%
  • * EPF will pay the principal and accumulated dividend from Account 2 into the member’s financing account with the selected bank at any age between 50 and 54, as chosen by the member (max. tenure is 10 years) or
  • * EPF will pay the principal and accumulated dividend from Account 2 into the member’s financing account with the bank at age 55. The amount paid will first be used to settle the remaining personal financing balance, if any, before returning any excess to the member

The advantage of using your EPF funds as collateral is that it does help you get financial assistance, without the impact of actually withdrawing your EPF funds. This means that the people will be able to get the financial assistance you need, while also ensuring that you will be enjoying the dividend from your EPF savings as well.

However, our opinion stands that taking out a personal loan using your pension/retirement money as collateral is a risky financial decision that should be avoided if at all possible. This type of loan can have significant long-term consequences, including a reduced retirement income, tax penalties, and a negative impact on your credit score. Instead, it’s important to explore other options for obtaining the funds that you need and to carefully consider the risks associated with borrowing against your pension/retirement. By doing so, you can help ensure that you have the financial security that you need to enjoy a comfortable retirement.

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