Why is lump sum payment for notional service more expensive than annual payment?

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messyleo

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Question for a friend in the CS - they just got a statement for purchasing notional service and they have approx 16 years left until retirement. The annual payent works out at 700 per year for the 16 years - the lump sum payment (one off) is 17k - which is more expsnive. Can ayone explain this? I would have thought it would be cheaper to pay it all up front now?
 
Is the €700 net of tax relief or something?

Whereas the €17k figure is gross but around €10k after tax relief and then less than the €700k a year?
 
messyleo said:
Question for a friend in the CS - they just got a statement for purchasing notional service and they have approx 16 years left until retirement. The annual payent works out at 700 per year for the 16 years - the lump sum payment (one off) is 17k - which is more expsnive. Can ayone explain this? I would have thought it would be cheaper to pay it all up front now?
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Probably because the lump sum is fixed but the periodic deduction is linked to pay:

"As indicated above, an officer may opt to purchase service by reference to age 60 or 65, as appropriate (age 65 only in the case of ‘new entrants’) and by either

(a) periodic deductions from salary commencing on the officer’s next birthday following the exercise of the purchase option and ending at age 60 or 65, as appropriate; these deductions are a fixed percentage , so their cash amount will increase as salary rates increase during the term of the purchase agreement; or

b) a lump-sum contribution, calculated by reference to the rate of salary applicable at the time the option is exercised, at a percentage rate based on the officer’s age next birthday,"
 
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Gordon Gekko said:
Is the €700 net of tax relief or something?

Whereas the €17k figure is gross but around €10k after tax relief and then less than the €700k a year?
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Thanks, I thought of that too but no, all figures are provided gross.

@Early Riser - I thought it could be something like that but teh difference seemed quite large. Good to know I ma not missing anything obvious.
 
messyleo said:
I thought it could be something like that but teh difference seemed quite large
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Given wage inflation, increments and possible promotions it is very likely that the periodic deductions will accumulate to at least the equivalent of the lump sum.
 
Great thanks - the person is top of scale so increments are unlikely but definitely wage inflation. Really appreciate the help on this that makes sense
 
AlbacoreA said:
There's an argument AVC are better option. Not entirely sure who.
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I don't know the actuarial calculations. But for me it would depend on what I wanted to achieve.
If it was to maximize the guaranteed lifetime annuity for self and surviving spouse I would go with notional service.
If it was to maximize any shortfall in the tax free lump sum and then have access to a flexible ARF fund for the remainder, I would go with AVCs.
Other considerations would be possible early retirement, plans for retirement spending, expectations around life expectancy, etc.
 
Early Riser said:
Given wage inflation, increments and possible promotions it is very likely that the periodic deductions will accumulate to at least the equivalent of the lump sum.
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You’d need wage growth of well north of 50% over the period for the cash amounts to break even. Not impossible but I wouldn’t use it as a base scenario.

And if wage growth is that much then interest rates and inflation will be high too so person would be better off investing in something else along the way.

To me the periodic approach seems like a no-brainer.

But this is a very narrow answer to the question. @Early Riser is correct that there are other potential factors.
 
NoRegretsCoyote said:
You’d need wage growth of well north of 50% over the period for the cash amounts to break even. Not impossible but I wouldn’t use it as a base scenario.

And if wage growth is that much then interest rates and inflation will be high too so person would be better off investing in something else along the way.

To me the periodic approach seems like a no-brainer.

But this is a very narrow answer to the question. @Early Riser is correct that there are other potential factors.
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You are probably right in that.
But note that wage growth is more than wage inflation. It includes increments and promotions as well. The prospects here will vary a lot individually and by sector. If prospects seem limited then the periodic approach seems much more attractive.
The other thing is a lump sum purchase locks in the additional notional years. If going with periodic deductions the duration being purchased can be diminished by early retirement, career breaks, etc. Also, if going part-time the deductions are not decreased and may form a hefty proportion of part time remuneration.
It also depends on whether or not the individual has ready access to the lump sum and doesn't have another use for it currently.
 
Just wondering if anyone can help .
I am a nurse and purchased 4 yrs notional service ,with a planed retirement age of 60, ,as a once off lump sum ,using my avc savings .I had assumed it was calculated on my gross earnings including nights and Sunday's .I now am not so sure , will they recalculate my earnings at retirement date and will I have to pay more if I've earned more gross salary than when calculations were done .
Chatter Box
 
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