Key Post:Public sector pension option to buy back service with periodic contributions

I have an option to buy back additional service for my public sector pension. The buy-back rates for lump sum purchases increased dramatically last year, and Dept Finance are due to increase the rates for periodic purchases imminently. However, any buy-back agreements which commence before the change in rates will be at the lower rate.

I'm waiting for the figures for my own situation, but at first glance, it sounds like this could be an offer that it too good to miss out. I'm thinking about topping up my mortgage (or deferring payments) and using these funds (approx 3.5% rate) to cover the costs of the buy-back.

Comments welcome....

Re: Public sector pension - Option to buy back service with periodic contributions

Hi Rainy,

Are you buying back years in a Civil Service scheme, a Public Service Scheme outside the Civil Service (non commercial state agencies, local authorities, HSE etc) or in a Public Sector Scheme (outside the Public Service) (commercial state agencies such as Bord Gas, ESB etc)? They all have their own rules and rates regarding buying back of years service.
aj

Re: Public sector pension - Option to buy back service with periodic contributions

Public service scheme - though our pensions advisor indicated that the rates/benefits were pretty much the same across all schemes at present. I hope to have the purchase rates for our scheme next week, and I'll post details then. Any other views in the meantime are welcome.

Re: Public sector pension - Option to buy back service with periodic contributions

Rainy,

I'm amazed how long it's taking the Dept. of Finance to increase the regular contribution rates in line with the lump sum rate increase - it would appear that exactly the same actuarial considerations must apply in either case.

I hurriedly took out a notional service contract last year when I discovered the rate rise was on its way. The mere fact that something is about to rise in price does not make it a good deal in itself, of course. However, I was struck that the monthly contribution I ended up paying was less than I had been paying into an AVC scheme originally designed to deliver exactly the same benefits.

The downside of notional service is that, unlike an AVC scheme, you're not building up capital and, apart from the spouse's pension, you've nothing to hand on to the next generation.

Re: Public sector pension - Option to buy back service with periodic contributions

Hi Oysterman - Did you get any actuarial advice on the decision? I see your point about the downside, but that's a double edged sword. You don't build up capital, but you do build up a state-guaranteed index-linked pension for life.

Re: Public sector pension - Option to buy back service with periodic contributions

Sort of....

Sat down and cranked out a number of scenarios Whatever way I cut the figures, if I live to any sort of average age at all it's a good deal (even without the huge benefit of the salary-linked spouse's pension).

It is very difficult to judge the public sector notional service scheme against an AVC scheme because there are so many areas of difference. Here are just a few to consider:

1) If you're on an incremental scale, the earlier you start buying notional service by regular contribution the cheaper it is because you pay a fixed %age of salary and will get the benefit of the extra increments and any additional allowances to which you become entitled. This is a significant benefit of notional service over AVC - any significant salary increases late in your career will tend to make an AVC scheme look severely underfunded.

2) Future public service inflation-adjusted pay increases are impossible to predict but if you extrapolate the last 10 years' figures the picture looks bleak for an AVC scheme trying to keep up with notional service.

3) A state guarantee of benefit versus the volatility of equity and money markets aids restful sleep.

4) No commission, bid-offer spreads or hungry salesmen bothering you with the state scheme.

5) AVCs probably win on flexibility i.e. if you take a career break your notional service contract is interrupted and you'd have to take a new one out on resumption of employment at whatever contribution rate and terms and conditions would then apply - this was not something I looked at or factored into the considerations since I never expect to be in a position to take a career break.

6) AVCs do give you a big lump of capital to pass on to the chosen ones if you don't go down the annuity route and your ARF performs well enough in your retirement to avoid significant capital drawdown.

Re: Public sector pension - Option to buy back service with periodic contributions

Hi Oysterman - Some good points there, particularly no.1.

All - I've got the quote for purchasing back years of 'standard' benefits for post-1995 entrants to the public sector.

In the case of a male employee aged 41 next birthday, the current periodic purchase contribution rate in respect of 1 year of notional service is 0.14% of full salary plus 0.68% of net salary. Does this look like a good deal?

Hi Rainy

That looks like a good deal - when we ran figures there (a few months ago) it showed a 1% AVC for a 40 year old male up to age 65 would purchase an estimated pension of 1.6% of salary at retirement (this is with 50% spouse pension, no pension escalation, retirement age 65).

In your example - your are getting a 1.67% GUARANTEE pension (with spouse pension I presume?, with escalation I would imagine in line with state pay increases?, with retirement age 60?) and you are only being asked to contribute about 0.8% of salary - even less cos some of this based on pensionable salary.

Is the retirement age 60?
If so the deal is excellent.

Thanks for the feedback. Retirement age is 65 and pension is index linked.

In that case the deal is good, if your circumstances will change in the future I do not know how they will calculate the entitlement that your extra contributions will give - but if your planning to stay there it beats the hell out of a DC AVC arrangement.

I started buying back 4 years 13 - 14 years ago and one of the points of the scale had a large increment and I essentially used this increment to fund 4 added years.