You are not inflation adjusting on the contributions side, or if you are a 7% real return is too generous. I would go with 5% real return plus 2% inflation.What am I not seeing here?
I simply don’t think you can ignore this. It’s a tax that private sector workers don’t payExtra ASC charge ignored for PS pension
Using this figure I get the residual 4% pension to be €14,590.
Yes, of course, I decided not to get into the obvious difference between the guaranteed nature of the PS scheme with the highly volatile/risky strategy of pure equity investment, which seems to be the assumption behind the contrarian example. 4% is a sort of accepted rule of thumb for drawdown of a pure equity ARF and I suppose on average it would provide an inflation linked annuity + an estate, but oh so what if?The assumed annuity rate of 4% is also over-generous. Knock it back to 3.5% to include spouse's pension and annual escalation and the annual pension is under €13,000 per year. Comparison with an ARF are invalid as an ARF is not a guaranteed lifetime income.
Looking at a Private DC vs Post '95 PS Pension
Private DC Figures
Total private pension pot after 40 years : € 898,361.46
- €65,000 annual salary over 40 years - doesn't vary for simpler calcs
- 6.5% annual contribution - no match by employer
- conservative 7% growth
lump sum of €97500
leaves € 898,361.46 - €97500 = € 800,861.46 in pension pot
annual income = presume a 4% withdrawal rate = € 800,861.46 * .04 = €32,034.46 pa
PS Pension:
lumpsum = salary * years * 3/80 = 65,000*40*3/80 = €97,500
annual income = (salary*years/80)- Contributory State Pension) = (salary*years/80)-13312) = €19,188 pa
Notes:
No employer contributions ignored for Private DC pension
Extra ASC charge ignored for PS pension
Add the inflexibility of PS pensions outlined in the above posts - and it adds to the poor comparison with private DC pension.
What am I not seeing here?
(and just before everyone piles in with small details that aren't in my assumptions that make negligible differences to the figures - it has to be a major omission for the PS pension to catch up with the DC pension.)
I've adjusted to account for ASC - for 65000 salary works out as 1.56% - therefore upped contributions for DC Private to 8.06%You are not inflation adjusting on the contributions side, or if you are a 7% real return is too generous. I would go with 5% real return plus 2% inflation.
I simply don’t think you can ignore this. It’s a tax that private sector workers don’t pay
These two adjustments will offset each other to some extent. I’ll let you crunch the numbers!
You're still not allowing for inflation. Pension pot €353,121 in today's money. Residual pension in today's money €10,244. PS figures do not change as they are inflation adjusted. And do you really believe inflation will be held at 2% for 40 years?I've adjusted to account for ASC - for 65000 salary works out as 1.56% - therefore upped contributions for DC Private to 8.06%
Reduced Growth Rate to 4.5%
Private DC Figures
Total private pension pot after 40 years : € 584,928.25
lump sum of €97500
leaves € 584,928.25 - €97500 = € 487,428.25 in pension pot
annual income = presume a 4% withdrawal rate = € 487,428.25 * .04 = €19497.13 pa
We're never going to get a perfect like for like comparison - but to all my private pension brethren who are influenced by the "Gold-Plated PS Pension" fallacy and feel they're hard done by - the numbers do not bear it out.
I am in the public sector - and if the government offered me to cash out the estimated value of my pension now so that I could put it in a private pension, to which I could continue to contribute - I'd grab it with both hands.
It would be one way to alleviate the state's PS pension obligation - allow public servants the choice to contribute their pension deductions to a private pension and you may see a rapid take up of the offer.
If you insist on using a 4.5% growth rate - it has to be an inflation adjusted return ( and it's still low compared to the last 60 years)You're still not allowing for inflation. Pension pot €353,121 in today's money. Residual pension in today's money €10,244. PS figures do not change as they are inflation adjusted. And do you really believe inflation will be held at 2% for 40 years?
You are of course right that historically fully equity investment throughout life would have worked out the better. The report above looks forward and projects 5% growth pre retirement and 2% post retirement with 2% inflation to be deducted. That gives them that your PS deal has a 25% employer subsidy. Clearly the PS deal is a much "safer" proposition, in particular on longevity. You would forgo the security and take the "risks" and that would have worked well in the past.If you insist on using a 4.5% growth rate - it has to be an inflation adjusted return ( and it's still low compared to the last 60 years)