NSP - lump sum or periodic?

J

j26

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I joined the civil service when I was 23 (post 1995 entrant), so I won’t be able to retire until I’m 63 (nearly 64 actually). I’d like to go a bit earlier
I’m wondering about Purchase of Service at the moment. Currently I’m at a certain level, but for various reasons it is quite likely that I will be at a much higher level within the next 3-4 years, and for this reason I’m thinking about purchasing service now as a lump sum rather than when it’s more expensive.
My best guess from looking at the tables is that it will cost me in or about 16,000 net of tax relief to purchase a years service in a lump sum, and for this I would gain at retirement (assuming I get to the level I'm aiming for and reach the top of the scale) a lump sum of €4,110 and an additional pension of €1,370 (at todays prices). And of course I’d get to go a year early.


So my questions;


First, does this represent a good investment?


Secondly, would I be better off waiting as although the contributions would increase, so would the tax relief?


Thirdly, would periodic payment be better as I would be able to claim tax relief on the entire contribution, whereas with a lump sum I can only claim it on part of the sum?
 
I'm not an expert on superannuation schemes, but my thoughts on your second question would be that there's no point in paying extra for something just to get extra tax relief. Let's say you get 41% tax relief on contributions. Paying an extra €100 for something needlessly does get you €41 extra tax relief, but you still have to pay the other €59 yourself and that's a waste.

In relation to your third question, with most private sector pensions if you exceed your limit for tax relief in a particular tax year, you can carry forward unused tax relief into future tax years until it is used up. Check with your employer if this is also the case with lump sum NSP.

From what you post, I'd say you're better off buying now while it's cheaper.
 
j26 said:
It means I could retire at 62 rather than 63.
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As far as I know new entrants can go up to 10 years before retirement date. Of course in such a case the pension will be reduced on the basis of it being paid early. Buying notional service doesn't affect this - the notional service will also be reduced on the basis of it being paid early. These reductions are very significant. But, you don't need to buy notional service in order to be able to retire early.
 
oysterman said:
As far as I know new entrants can go up to 10 years before retirement date. Of course in such a case the pension will be reduced on the basis of it being paid early. Buying notional service doesn't affect this - the notional service will also be reduced on the basis of it being paid early. These reductions are very significant. But, you don't need to buy notional service in order to be able to retire early.
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I'm post 1995 but pre 2005 - I can retire anytime after 60 without an actuarial reduction, but the thing is I won't have service. I can buy up to 3 years and 340 odd days service to reduce the age I retire at (on full pension) down to the age of 60.

You seem to have misinterpreted my question.
 
j26 said:
You seem to have misinterpreted my question.
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Apologies. "...I won’t be able to retire until I’m 63..." led me to believe that you thought you wouldn't be able to retire until you were 63!

To take your three questions in order:

1) It's up to you to decide if it might be a good investment for you. If you live to a ripe old age it'll have been great investment but if you die a couple of years after retirement it'll have been a dog. So there's no absolute answer at this stage.

There's a key post on the NS/AVC question. Have a look at it (there are plenty of other threads worth having a look at as well). It would be worth your while speaking to an independent financial adviser.

One point you should consider: are you sure you'll need a full pension? How much value would you get out of the money you'd have to pay to secure it? There's little point in depriving yourself now to fund a pension at a level you wouldn't need. Of course, your answer to this has to be subjective and based purely on instinct.

2) It's hard to see how waiting until something becomes more expensive in order to get more tax relief on its purchase is ever going to be a winning strategy - unless you're currently a lower rate taxpayer who expects to move into the higher bracket. If that's the case, the consensus on this site is always to wait for that to happen before making discretionary pension contributions which are not employer matched.

3) We'd need more information. If you were to make a lump sum purchase, how much of that purchase would not be tax deductible? You won't find many advocates here or anywhere else for buying any sort of pension entitlement out of net income.
 
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