Buying back years in a public sector pension

M

monnigblower

Registered User
Messages
16
Hello,

My wife is thinking of buying back years in a public sector pension with money from a savings policy. Is this a good idea or would it be better to leave the savings policy mature away? Some people say a public sector pension is the best around. What do people think?

Kind regards,
M.
 
HI MB and welcome to AAM!,

The public sector comprises at least three different groups:

1. The Civil Service.
2. The Broader Public Service (Guards, Teachers, Local Authorities, HSE etc)
3. Commercial SemiState Organisations (ESB Bord Gas etc)

The pension (superannuation) arrangements while bearing some resemblance differ widely in terms of contributions and benefits.

In order to have a usefull discussion concerning public sector pensions you need to be more explicit as to what part of the PS you are talking about. 'Buy service' arrangements differ depending on what scheme you are in.

aj
 
Hi,

Thanks for the replies but of the following

1. The Civil Service.
2. The Broader Public Service (Guards, Teachers, Local Authorities, HSE etc)
3. Commercial SemiState Organisations (ESB Bord Gas etc)

I believe that the pension is HSE since my wife works in an organisation funded by the department of health. All replies more than welcome.

-M.
 
I work for the HSE also, I have only been working for about nine months but from what work colleagues say it is well worth buying back pension years. I think it has to do with tax relief. Sorry I can't be more clear about it, maybe an independent financial advisor would be able to help
 
I'm also currently buying back pension years, I think about 3 years or so. Basically they divide the the contributions over the rest of your potentional employment time (up to your 65th birthday), so I think I'm only paying about 40 Euros net extra per month. It's more gross, but the good thing is it comes out before tax, so you might not even need to touch your savings... Don't think you can buy them all at once anyway....
 
Petal said:
I'm also currently buying back pension years, I think about 3 years or so. Basically they divide the the contributions over the rest of your potentional employment time (up to your 65th birthday), so I think I'm only paying about 40 Euros net extra per month. It's more gross, but the good thing is it comes out before tax, so you might not even need to touch your savings... Don't think you can buy them all at once anyway....
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you can. You either pay a lump sum or else you pay it off on the never never and it comes out every month.
 
Monnigblower

I believe that the pension is HSE since my wife works in an organisation funded by the department of health
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You need to check this. Your wife is either working for the HSE and in their pension scheme or not! Many organisations are funded by Dept of Health but are not actually HSE. I suspect that you are fairly certain that she is in HSE pension scheme. If so, an independent advisor would be worth a few quid. Sometimes buying back service is made to be very expensive and then you have to live long enough to get the benefit back after retirement.

A public sector pension is said to equate to a pension fund of 27 times the annual benefit!

Slim
 
Check your wifes payslip. Does it state what organisation she works for? Is there a deduction for "superannuation" or "pension"? If so then she should ask for a scheme booklet which outlines the rules, benefits and contributions. She is also entitled to an annual pension statement which outlines what she has contributed and what benefits have accrued. In the first instance payroll will be able to tell you what pension scheme the deductions are going to.
 
Slim said:
Monnigblower

A public sector pension is said to equate to a pension fund of 27 times the annual benefit!

Slim
Click to expand...

Do you mean by that that the pension fund is 27 times the state pension? Obviously this is on average.
 
If one was trying to put a capital value on the Civil Service pension package, based on current annuity rates, I would estimate a value of about 19 times earnings.

In other words, a Civil Servant retiring on a salary of say €80k and getting a pension of €40k (plus spouses and indexation benefits) plus a tax-free lump sum of €120k at age 65, would need a total pension fund of circa €1.5m to buy such benefits on the open market.

However since Civil Service benefits are unfunded, this "cost" is never visible, accounted for or apparently taken into account in benchmarking discussions.
 
But Conan, the Pension is paid out of current funds it is not bought on the open market.

If I retire at 65, I can expect to live for another 20 years or so. My pension as you have set out above will be €40,000 times 20 plus my Lump Sum of €120,000 or €920,000 in total.

Buying such a pension on the open market necessitates "wetting the beak" of the various Pension Providers, Agents etc. in this case, to the tune of over half a Million.

You must also take into account that the Pensioner will have paid PRSI contributions, and will therefore be entitled to the State Contributory Pension.

This is payable from Age 66 and currently is €243.30 per week, €12651.60 per year or €240380.40 over the 19 years it is being paid.

That brings the cost of the Pension down to €679619.60.
 
Three points:
- a typical Civil Servant (Class D PRSI) pays a much reduced rate of PRSI and therefore does not get a State Pension at age 66.
- assuming a male retiring at age 65 (average life expectancy 20years), a spouse (assuming 3 years younger and likely to outlive male pensioner by some 7 years) gives a total Pension term of circa 27 years
- allowing for pension indexation means that the starting pension might increase by circa 50% over the term (assuming 2% increases).

My original point was that if you capitalized the pension value (similar to Private Sector) then the multiplier gives a “cost” of c€1.5 for the example stated. Yes this is an average some will die sooner and some will live longer. Using the Annuity cost is a reasonable comparison.
 
Conan said:
Using the Annuity cost is a reasonable comparison.
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Yes, but if you are comparing the "retail" cost of purchasing that annuity, you must discount your €1.5m for the profit margin that your private sector annuity provider will make over the lifetime of the product. www.pedantic.com
 
Even if you do discount the price for the profit margin (arguable), it still a lot more than €679,619.60.
 
Well I would think the state is the largest single pension provider in the state, so notional 'profit margin' is probably of significant magnitude to be very relevant. And also there is a wide breath between €1.5m and 0.6m, its probably towards the former in fairness but still.

I understand the point about capitalisation values. Under Class D PRSI, the employee pays 0.9% and employer 2.35%. Class A, 4% and 10.75%. So your point that the Contributory Pension has to be included in the capitalisation value as a civil servant pays "a much reduced rate of PRSI", while true, the vast bulk of the reduced rate is on the employer side. The state (as a pension provider) is foregoing the "employer" contribution from the state (as an employer).

So the capitalisation value of the Contributory Pension should be accounted for by the "notional" PRSI contribution that the employer (the state) should be paying to itself (10.75-2.35=8.4%). Notwithstanding the reduced employee contribution of course and whatever 8.4% of 40 years worth of earnings is worth?!
 
Just using Class A as the example, what is/was the equivalent Private Sector PRSI Class for pre-1995's?
 
Class D contributors do not get a State Pension under Social Protection. They are members of a “non-integrated “Occupational Pension Scheme. My original post was simply trying to put some “capital value”on the benefit comparedsay to a Private Sector DC scheme.
As I have posted elsewhere on this site, I am simply trying to value the typical Civil Service pension as we have often seen cases where senior CS have retired early, been granted additional years service for free and mainly because the value of such benefits are never crysyalised. Nobody ever accounts for such pension additions ( because there is no “funding”) which contrasts with the private sector where such additions actually cost real money. But perhaps that’s another debate?
 
Conan said:
Class D contributors do not get a State Pension under Social Protection. They are members of a “non-integrated “Occupational Pension Scheme.
My original post was simply trying to put some “capital value”on the benefit compared say to a Private Sector DC scheme.
Click to expand...

But in comparing the capital value you must compare the "Non-integrated occupational pension" with the Private Sector Pension Capital Value PLUS the Contributory State Pension (as the Private Sector employer has paid for this, largely).

So a 40k 'non-integrated public sector pension' should be compared to a 28k private sector pension where that person also qualifies for the 12k state pension. So if your Private Sector guy spent his "€1.5m" pot, he would have the equivalent of the 'non-integrated pension' PLUS 12k state pension, which the other doesn't recieve.

The integrated Public Sector Scheme equalises this, even though both pensions are final salary schemes.

Conan said:
As I have posted elsewhere on this site, I am simply trying to value the typical Civil Service pension as we have often seen cases where senior CS have retired early, been granted additional years service for free and mainly because the value of such benefits are never crysyalised. Nobody ever accounts for such pension additions ( because there is no “funding”) which contrasts with the private sector where such additions actually cost real money. But perhaps that’s another debate?
Click to expand...

It is indeed another debate!
 
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