Sensible people have pensions! Of course when you are in your 20s you are not sensible, and would rather spend the extra money on the here and now...retirement seems SO far away! If you are lucky you will have a job where the employer has an occupational pension scheme that is compulsory...most of us are grateful for this when we near retirement age. Others, who don't have pensions wished they'd known then what they know now. As well as providing an income in the future, and tax breaks in the present, a pension plan can provide a source of funding for anything from school fees to buying a home.

In the US the majority of the workforce is likely to find their retirement income provided by something called a 401K. This is basically a tax-advantaged investment acccount. The funds in the account are invested in stocks, bonds and the like and are not capital gains, dividends or interest taxed until they are withdrawn.

There are five main attractions of the 401K plan:

Tax advantage: no interest or dividends are taxed on these plans until withdrawn and in the meantime they grow on a tax deferred basis. For someone who starts a plan in their twenties, this can mean a huge fund at retirement.

Employer match programs: many employers will match a certain percentage of the employee's contribution, as a way of attracting and retaining key staff. In pretty much all cases, if your employer will do match for match, you should pay in the maximum amount possible that your employer will contribute.

Investment flexibility: employees have a range of choices as to how the assets are invested, so those prepared to take more risks can opt for a heavy equities based option; those with lower expectations could stick with short term bonds and the like. An employee can hold stock in the company for whom they work, although this is not encouraged by financial advisors in case the company folds, taking the retirement fund with it.

Portability: the 401K plan can move jobs with the person it belongs to; you can leave the funds in the original employing company (although you will be charged administrative fees); you could transfer the whole to another employer...provided the job is in place before moving; complete a 401K rollover which means moving the entire fund to an Individual Retirement Account (IRA), which is the most flexible of options; the final option is to cash out the plan and pay the current tax bill plus a 10% penalty. This last is never recommended as the loss of future income from the build up of a tax free fund is immeasurable.

Loan withdrawals: The purpose of the 401K plan is primarily to fund your retirement income. However, the government does allow your plan administrators to grant loans for people who have no other way of getting hold of a lump sum of cash. Some 401K administrators do not offer this option, and it is not law for them to do so. The main benefit of such a loan is that the proceeds are not subject to taxes or the 10% penalty fee, except in the case of default. The government does not set any guidelines or restrictions, but many employers do in terms of the minimum amount of the loan, the number of loans outstanding - some may even require spousal consent in the case of a married employee.

LOANS

For many couples and families, saving out of an income is difficult, and so the equity in a home is probably the only option for obtaining funds at short notice - remortgaging.... to perhaps buy a much needed new car or to fund a child's educational needs. However, unlike in the UK, it is also possible to borrow from your pension fund.

Although up to $50,000 or 50% (whichever is smaller) of your 401K fund can be borrowed, this should never be seen as the first stop for a cheap and quick loan and there are many pros and cons.

Pros:

*It is a quick option....can take as little as one week to get a loan approved.

*You do not have to go through a credit approval process.

*The interest rates are usually competitively low.

*Inerest paid goes back into your own fund so you benefit. You have to pay back usually within 5 years (or 10 years if you are funding purchase of a house).

*You avoid paying taxes and the 10% early withdrawl penalty.

Cons

*You will penalise the growth of your retirement fund.

*Some plans freeze contributions until outstanding loans are paid back in full, which essentially erodes the growth of the fund.

*Loans are repaid by deductions from your wage packet so this will reduce your take home pay.

*If you were to leave your job, or be made redundant, you would have to pay back the loan within 60 days or face early withdrawl and tax penalties, which could amount to a lot of dollars.

At first glance, borrowing against your 401K seems a cost effective way of getting hold of a lump sum, but you would have to think very, very carefully before using this option for anything but relatively small amounts.The biggest risk would be losing your job, through no fault of your own and not being able to pay back within the stipulated 60 day period.

It is always a bad thing to borrow against what you know to be your only retirement income; possibly the only time it is acceptable is when purchasing your home as that is something you will always need; but there is another rather insidious way of dipping into your pension savings and that is the 401k debit card. Called the ReservePlus, this card allows employees to draw instant funds from their 401Ks.

The ReservePlus customer can decide how much money to set aside for future borrowing against the 401K and the amount is then held in a money market fund. He can even withdraw from an ATM using the card.

If a company adopts the ReservePlus programme, employers can opt to have a ReservePlus account online and transfer their loan line into it. The repayments are made not through the payroll, as in a straight loan from the 401K; the card owner is billed directly and pays back through the same mechanism as a credit card. The danger of this of course, is that bills will be overlooked and the card owner will default on the loan repayments. Not only that it makes it so easy to just spend your retirement income without really considering the impact this will have on your future.

This card was first offered in 2003 and those signing up for it are increasing. The card issuer maintains that it encourages more people to sign up to retirement programmes in the first place in the knowledge that the funds won't be locked up for years. Clearly though, this is a worrying trend - the spend now, worry later attitude has grave implications on an increasing retirement population.

Exponents of the card say that for companies it is beneficial - now they don't have the administrative burden of approving loans and collecting repayments. For the employee it has taken away the first safety net....to have a normal loan from the 401K approved takes a week or more, which allows the applicant time to think very seriously about taking the loan in the first place. Swiping a debit card.....you can do that with your eyes closed and no thought at all.

Apart from the obvious instant access to money, the card scheme has other advantages to those that sign up for it. Firstly, if the employee ceases employment for whatever reason, instead of the 60 day payback window, an employee can continue to pay back the loan even if they move jobs. They can also pay back more than the minimum or more than a payroll deducted set amount.

The card system may be convenient, but the interest rate is 2.9% higher than the prime rate, plus holders have to pay an initial set up fee. A conventional loan from the 401K means that interest is paid back into the 401K holder's account. With the card the interest goes elsewhere. In additon, defaulting is going to be more common than in a payroll payback scheme.

Experts worry that a good percentage of the current workforce has not set aside enough money for their retirement, and being able to erode one's nest egg in this way is detrimental to the wellbeing of the employee. Of course it is advised that this scheme only be used for a loan of last resort such as help with a home loan or a dire medical emergency... even so, the 401K is designed to be used for retirement and it is defeating the purposed of it if people are encouraged to dip into the funds in this way.

But with such easy access, and the live now pay later mentality of many, it is tempting to just go shopping.

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