No value in buying years of service!

[sector_000]

Current age = 48. Retirement age from Public Sector job = 65.

I have found out from my pension dept that if I choose to make an extra once-off payment (prior to age 49) to buy some fraction of years of service.... for €10,000, I can buy:
Additional Pension of €357 per annum
Lump Sum €1,493

I know I'd get 41% tax relief, but still, how on earth is that value for money?
By the way, I can only realistically assume 0% salary increases till retirement.

My point is that if I was in my old private sector job and did a €10K AVC, I'd expect it to compound at a modest 4% over next 17 years to yield a pot of €19.5K which if rolled into an ARF ought to be allow a 4% draw down (plus adjustment for inflation) pretty much for 30 years producing a yield of €779 per anum.

Am I missing some obvious gem in this public sector DB pension??

 

[LDFerguson]

Can't argue with your figures. A few minor points about your methods but they don't really affect your conclusion: -

• In comparing with an AVC you should take off the same lump sum from your final value and then apply the income. But the income from the ARF would still be higher than the NSP.
• Minimum annual income from an ARF is 5%.
• If you're using an assumed growth rate of 4% net of all charges on the AVC and if the charges are, say 1.5% per year, your AVC fund would need to be growing at 5.5% per year which assumes a certain level of risk has been taken. The NSP is nominally "no risk" in that the Government guarantees the level of pension, but there is nonetheless a very real risk that the Government could hack at the superannuation scheme in some other way before you hit 65.
• You can still do an AVC in the public service - there may be an incumbent broker offering them or you can arrange your own AVC PRSA with a provider of your choice. If you look at the former, be careful of charges - my experience of some of the union-approved AVC schemes has been that their charges are very high.

Liam D. Ferguson

 

[ashambles]

While it doesn't look worthwhile - 10k in pension terms really gets you nothing public or private, you're making two assumptions to help your argument.

1) 4% average fund return - based on personal experience for the last 10 years this has run at around 1%. Also as you approach 65 you need to move funds to cash which typically returns less than inflation.

2) 0% pay rises for 17 years and then 0% pay rises for maybe another 20-30 years of retirement - almost half a century of a pay freeze. I'd bet my pension this wouldn't happen.

In the last 10 years despite the pay cut government salaries are up a lot more than 0% - depends on the area but 30% or so is what the CSO indicate. 40 years ago salaries might have been 5000 euro now they're around 50,000 that around 1000% growth in a similar timescale to where you're talking about seeing a 0% return.

 

[shigllgetcha]

This is notional service I assume?

Notional service is terribly expensive and doesnt get you much, no one really buys it

Notional service isnt costed the same way as you paying your normal pension contributions every month

 

[Complainer]

This is notional service I assume?

Notional service is terribly expensive and doesnt get you much, no one really buys it

Last time you posted this, I asked you to explain your comment and give a source for your 'terribly expensive' comment. I don't think you responded. I don't think it is helpful for you to make definitive statements like this, unless you can back them up with hard figures.

The NSP is nominally "no risk" in that the Government guarantees the level of pension, but there is nonetheless a very real risk that the Government could hack at the superannuation scheme in some other way before you hit 65.

That's not the only risk - there is also the risk of Government default, as happened in Greece, where all pensions were cut by 15% or more.

 

[shigllgetcha]

Last time you posted this, I asked you to explain your comment and give a source for your 'terribly expensive' comment. I don't think you responded. I don't think it is helpful for you to make definitive statements like this, unless you can back them up with hard figures.

Sorry didnt see the reply give me a while to come up with an example, the cost and the value related to it.

Ill try to track down the other thread and add to it too

 

[shigllgetcha]

A Class D officer who works in the health service with 35 years service when they reach 65 who is currently 60 on €50,000 per annum would be expected to pay €64,750 to purchase the 5 years they are short and cant make up

This would increase their pension by €3,125 per annum and their lump sum by €9,375. Saying they live for 15 years after retirement they would get €56,250 extra in their life time based on them living to age 80 which i believe is the average life expectancy in ireland

Compared to their normal contributions for 5 years service of €12,500 (€50,000 * 5 * 5%) its over 5 times as expensive.

* for the sake of transparency the above example would pay €16,250 in PRD if you made 5 years normal contributions but the PRD is just a tax on public servants, even public service workers who cant access the pension scheme have to pay it so I wouldnt include it in the figures, you can if you want

*Ive left out inflation or pay increases. 15 years inflation at 2% would be €8,247.77 extra in pension payments which i guess youd expect in a private penion scheme anyway which makes it moot

 

[Complainer]

Compared to their normal contributions for 5 years service of €12,500 (€50,000 * 5 * 5%) its over 5 times as expensive.

I don't understand why you're comparing it to the cost of normal contributions. The choice of the employee is to put the pension contributions into notional service, or into an AVC. The only sensible comparison is to compare the benefit they'd get through notional service with the benefit they'd get from an AVC.

 

[shigllgetcha]

I don't understand why you're comparing it to the cost of normal contributions. The choice of the employee is to put the pension contributions into notional service, or into an AVC. The only sensible comparison is to compare the benefit they'd get through notional service with the benefit they'd get from an AVC.

I cant compare it to what theyd get from an AVC, maybe someone else can do this.

 

[Slim]

I think the main purpose of NSP is not to be attractive but to be a last resort for some to make up short service if they enter the PS late or take out for a few years. In essence, you are buying pension for years you have not worked (for the public sector) so there is no incentive on the employer's part to make it attractive. With the advent of PRSA's being made available to PS workers in 2003, it has become less attractive to purchase NSP, combined with the fact that the Department(Fanance?) altered the terms of the scheme to make it more expensive/less attractive.

The disadvantage of NSP is that, lump sum aside, you are gambling on living long enough to get your value out of it. Some will and some will not. A PRSA/ARF can be left in its entirety to relatives on death.

 

[DerKaiser]

I cant compare it to what theyd get from an AVC, maybe someone else can do this.

https://www.pensionplanetinteractive.ie/ppi/public/loadPensionChoice.action

A fully inflation protected pension of €3,125 p.a. for a 65 year old male could cost almost €100k on the open market.

The cost with no inflation (ever) would be over €60k.

A 65 year old male can expect to live past their mid 80s on average when expected improvements in mortality are taken into account.

 

[Complainer]

I cant compare it to what theyd get from an AVC, maybe someone else can do this.

Would you like to comment now on Kaiser's calculation?

How did you conclude that 'Nobody really buys it' (NSP)?

 

[shigllgetcha]

Would you like to comment now on Kaiser's calculation?

Thats fair enough but I think people dont see it as a good return.

Would a non protected pension scheme have a good chance of a better return?

How did you conclude that 'Nobody really buys it' (NSP)?

I know this from work, I asked the person I know that is designated to deal with NSP said they could only remember one person that ever bought it and everyone is put off by the cost. I dont really want to go into where I work any further or I wont be able to post here.

Im just trying to get acrss that the majority of people offer NSP dont see it as a good return

 

[Complainer]

Thats fair enough but I think people dont see it as a good return.

Would a non protected pension scheme have a good chance of a better return?

Perhaps you should have asked this question, and done whatever reasearch was required to come up with some answers, before you came out here with definitive recommendations to other posters that appear to be based on thin air?

I know this from work, I asked the person I know that is designated to deal with NSP said they could only remember one person that ever bought it and everyone is put off by the cost. I dont really want to go into where I work any further or I wont be able to post here.

Im just trying to get acrss that the majority of people offer NSP dont see it as a good return

If you had come down here and said "In my job, I hear from the HR person that only one person had bought it" then that would be fine. You didn't. You came out with a very broad and definitive statement that 'no-one ever buys it'. That's a big difference.