# Irish Times:"Exposing a two-tier and unequal pension system" public vs. private



## Brendan Burgess (10 Jul 2017)

An interesting editorial in today's Irish Times. 

*Pension provision: exposing a two-tier and unequal system*

* Overhaul needed to put private and public sectors on more even footing*

"For instance a TD retiring at the age of 60 on full benefits after 20 or more years service will get a tax free lump sum of €135,000 and a pension of €45,000 a year. The cost of this pension on the open market would be €2.38 million but the Revenue Commissioners calculate the value of a Dáil deputy’s pension at €1.48 million. The critical point here is that pension pots valued at €2 million or more are subject to a “super tax” rate of 70 per cent. A TD is treated as being well under this threshold but a private sector employee with the same pension entitlements is over the limit and liable to “super tax”.



I am not sure about picking out a TD as an example - it applies to all public servants I presume? 

How does the 70% super tax operate? 

The solution is to just put all public servants on defined contribution schemes. 

Brendan


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## cremeegg (10 Jul 2017)

Using a TD as an example engages public sentiment more than if they had referred to a generic public servant.

The IT has long pushed the news business to the background, in favour of the sentiment driven campaigning business.

I happen to agree with them on this one, but it's still distasteful.

You are absolutely right that all public servants should be on DC schemes.


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## torblednam (10 Jul 2017)

Brendan Burgess said:


> An interesting editorial in today's Irish Times.
> 
> *Pension provision: exposing a two-tier and unequal system*
> 
> ...



I like how you say "just" as if it's simple! 

How would you see that being implemented? 

Prospectively for new recruits only, or retrospectively for all existing staff?

Or somewhere in between?


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## Early Riser (10 Jul 2017)

Brendan Burgess said:


> I am not sure about picking out a TD as an example - it applies to all public servants I presume?



As far as I know TDs qualify for full pension after 20 years service (20/40), whereas for most public servants it is 40 years (40/80). Some groups have faster accrual, eg, Gardai.


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## Brendan Burgess (10 Jul 2017)

Guys 

Stay on topic.  No need to argue about people editing their posts. 

I would not discourage anyone from reviewing their posts after posting them, and editing them accordingly.

Brendan


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## Brendan Burgess (10 Jul 2017)

Hi Mandlebrot

How are the many Defined Benefit schemes in the private sector converted to Defined Contribution schemes? 

At the very least, stop them for all new entrants. 

But I would also stop them for all existing employees as well. 

I might do some sort of hybrid scheme whereby they are defined benefit for low earners or for the lower parts of people's salaries and then DC for the rest.

Brendan


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## torblednam (10 Jul 2017)

Brendan Burgess said:


> Hi Mandlebrot
> 
> How are the many Defined Benefit schemes in the private sector converted to Defined Contribution schemes?
> 
> ...



Re the change from DB to DC in private sector: I've no idea, but then I'm not the one suggesting it should be done! If you're modifying it for existing employees I presume you'd have to preserve their accrued benefits up to the date of changing (x/80ths etc...), and then go DC thereafter.

That's probably not the trickiest part though; it's the negotiations around the employer's contribution to the new DC scheme, where things would get very interesting...!


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## jjm (10 Jul 2017)

Brendan as you should know there is no pension pot/fund in the public service to convert there is only an entitlement in law to a pension as set out in there  comtract of Employment in the public service,Which is the point i was going to make to torbednam when he said he agreed public servants should have a defined contributions pension,The problem is into the future any money the government takes in tax will first have to go to honoure there contracts and all other contracts the government have entered into on our behalf,

I think what happens in the private sector in Employer /employees get an pension actuary to see if fund  covers pension  entitlements they it is transfered to the employees name/This can be a buy out bond/ up untill a year ago thas pension had to be taken as an annuity. law is now changed so can be used as an ARF


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## Early Riser (10 Jul 2017)

Brendan Burgess said:


> The critical point here is that pension pots valued at €2 million or more are subject to a “super tax” rate of 70 per cent. A TD is treated as being well under this threshold but a private sector employee with the same pension entitlements is over the limit and liable to “super tax”.
> 
> I am not sure about picking out a TD as an example - it applies to all public servants I presume?
> 
> ...



I think the more realistically attainable solution, in the short to medium term at least, is for the Revenue Commissioners to apply an objective actuarial assessment to the value of public service pension pots and apply the 70% supertax accordingly. There is no reason this could not be done immediately. 

For post 2013 entrants the value of the pension has been reduced severely. Even post 2005 entrants don't qualify for full pension until 65 (reducing actuarial value). For low to middle grades even a full pension is very modest when the State Pension element from PRSI is taken out of it. As jjm2016 has pointed out, there is no pension pot/fund so changing to DC would be very challenging.


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## Firefly (10 Jul 2017)

The key sentence for me is as follows:

_There are understandable and valid reasons why public servants were given more favourable treatment in the past. The generous pensions were an inducement to some of the best and brightest people in the State to stay in the public sector rather than bringing their skills and experience into the private sector where they could have earned more. _

This was the case in the past where PS workers earned less than private sector workers. The pension was seen as the handcuff as is where to keep people in the PS. Today however, thanks to bench-marking in particular, PS workers earn _more_ than those in the private sector. With job security thrown in, it's gone out of kilter IMO. Wages are "sticky" - easy to increase but difficult to reduce. Therefore, in the name of fairness, the sooner the PS pensions are converted to define contribution the better.


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## Duke of Marmalade (10 Jul 2017)

I read the IT article and was inclined to write them a stiff letter except I am right out of cardboard

The "super tax" is an anomaly which no one is meant to incur.  It arises because if you over fund your pension in the second pillar (tax relief supported) you are taxed at marginal rate on the excess.  So let's say your excess is 100.  40 is lopped off giving 60 and when you go to tax that at 50% marginal rate only 30 is left, a total tax take of 70.

But as I say only a fool would allow that to happen.  It's an anomaly for sure but not evidence of a wicked conspiracy against the private sector.  In fact there is a strong argument that no one should let their second pillar pension pot get anywhere near that level since the latter part of the pot will be taxed at 50% when benefits are taken  whilst relief on contributions was only at 40%.  The reality is that at these levels private sector pensions should come from third pillar savings and again at these levels there are usually some very handsome bonuses (not enjoyed by the Public Sector) to fund such third pillar provision.


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## Steven Barrett (10 Jul 2017)

This article appears to be a stitch up to start another public v private sector arguement. 

From what I understand from the article, they are comparing the valuation of the public service pension to going to an insurance company and saying "how much for a pension of €45,000 a year?". What they seem to have left out is that members of private sector defined benefit schemes have the exact same valuation methods. 

And that the Revenue recently changed the valuation method of defined benefit pensions. It used to be 20 times the benefit, regardless of when you drew down benefits. That meant that Brian Cowan's pension which was paid from age 52 would have had the same value as the same pension drawn down at age 65. The new method reflects the age that the benefit is payable from.  The new method is only used for benefits accrued from 01 January 2014. All benefits accrued before that are still on 20 times benefit basis. 

And where is the details of the lower paid public servants whose public service pension also includes the OAP? So if they are due a pension of €14,000 a year, €12,000 is from the OAP and €2,000 is from 40 years of contributions? Or the career average method that is now in place for new public servants? 

Very poor article


Steven 
www.bluewaterfp.ie


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## Firefly (10 Jul 2017)

Brendan Burgess said:


> The solution is to just put all public servants on defined contribution schemes.
> Brendan



I agree 100%.


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## Duke of Marmalade (10 Jul 2017)

Steven, it really is a bad article.  Maybe you have a supply of cardboard to write that stiff letter.


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## Firefly (10 Jul 2017)

torblednam said:


> Re the change from DB to DC in private sector: I've no idea, but then I'm not the one suggesting it should be done! If you're modifying it for existing employees I presume you'd have to preserve their accrued benefits up to the date of changing (x/80ths etc...), and then go DC thereafter.


I agree. Existing benefits should be honoured 



torblednam said:


> That's probably not the trickiest part though; it's the negotiations around the employer's contribution to the new DC scheme, where things would get very interesting...!


A lot of large organisations have a matching system where they match employee contributions up to 7 or 8 %, so I would be in favour of this.


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## Nordkapp (10 Jul 2017)

Brendan Burgess said:


> The solution is to just put all public servants on defined contribution schemes.
> 
> Brendan



I would rephrase that and put it along the lines of" The solution is to just put all new entrants to the public service on defined contribution schemes". It would be political suicide to change existing built up DB pensions.

I am surprised, given the unions are on the back foot for the last number of years, DC schemes for new entrants were not forced through during the FEMPI era.


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## Steven Barrett (10 Jul 2017)

Duke of Marmalade said:


> Steven, it really is a bad article.  Maybe you have a supply of cardboard to write that stiff letter.



I don't need any cardboard when there is a comment section at the end of the article! 


Steven
www.bluewaterfp.ie


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## jjm (10 Jul 2017)

torblednam said:


> Re the change from DB to DC in private sector: I've no idea, but then I'm not the one suggesting it should be done! If you're modifying it for existing employees I presume you'd have to preserve their accrued benefits up to the date of changing (x/80ths etc...), and then go DC thereafter.
> 
> That's probably not the trickiest part though; it's the negotiations around the employer's contribution to the new DC scheme, where things would get very interesting...!


I suspect the fiscal space for increases/cutbacks in all governments payouts let it be wages /Entitlements would have to be tilted for the first time in favor of people public/Private who are over paying for there long term  entitlements compared to others who get the same long term entitlements ,I suspect the lid is going to come off this can of worms very shortly ,
The irish times is only the start pity the only picked on public servants,

When i put  money into my Employer defined pension scheme along with my employer is invested and not spent which is a government requirement. Pity they do not do the same also

PENSION PROVISION EXPOSED A TWO TIER AND UNEQUAL SYSTEM

THERE IS NO PROVISION SO WE WILL NOT HAVE A TWO TIER SYSTEM WHEN WE RUN OUT OF MONEY LONG TERM FIRST IN LINE WILL BE THE SYSTEM USERS,


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## Early Riser (10 Jul 2017)

Firefly said:


> This was the case in the past where PS workers earned less than private sector workers. The pension was seen as the handcuff as is where to keep people in the PS. Today however, thanks to bench-marking in particular, PS workers earn _more_ than those in the private sector



There is some validity in this but I wouldn't go with you all of the way. In speciality roles, particularly at the higher end, the income rewards are often greater in the private sector and there is active recruitment going on. Retention is an issue in some areas. The difficulty is lack of flexibility in the Public Sector and "linkages" negotiated by the unions. Rates of reward cannot be increased in any one area (where there is a shortage) without knock on effects right across the board.

As regards the handcuff, I suspect that for many security of tenure has been a bigger factor in this than pensions. Back in the pre-crash boom times (with bench-marking in full swing) I recall several opting for the private sector in the expectation of "making it" quickly. And I have subsequently heard some of them complain about public sector pensions.


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## jjm (10 Jul 2017)

SBarrett said:


> I don't need any cardboard when there is a comment section at the end of the article!
> 
> 
> Steven
> www.bluewaterfp.ie



It was very poor and badly researched but it is a start and as you can see getting traction which can only be good for public/private sector long term ,


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## cremeegg (10 Jul 2017)

Firefly said:


> The key sentence for me is as follows:
> 
> _There are understandable and valid reasons why public servants were given more favourable treatment in the past. The generous pensions were an inducement to some of the best and brightest people in the State to stay in the public sector rather than bringing their skills and experience into the private sector where they could have earned more._



I have always believed that the generous PS pension arrangements arose because Trade Union negotiators were able get them past politicians who knew that the costs would not materialise until long after they themselves had left the scene.

There is no cost to any current administration in agreeing a pension benefit which will not become due for many years. An easy sop to the unions.


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## Firefly (10 Jul 2017)

Early Riser said:


> The difficulty is lack of flexibility in the Public Sector and "linkages" negotiated by the unions. Rates of reward cannot be increased in any one area (where there is a shortage) without knock on effects right across the board.



+1. Look at all the hassle trying to hire nurses. If the demand is there the wages offered should be increased, but doing so would result in an orderly queue forming at government gates.


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## Firefly (10 Jul 2017)

cremeegg said:


> I have always believed that the generous PS pension arrangements arose because Trade Union negotiators were able get them past politicians who knew that the costs would not materialise until long after they themselves had left the scene.
> 
> There is no cost to any current administration in agreeing a pension benefit which will not become due for many years. An easy sop to the unions.



Yip. Plus the fact that politician's pensions are also DB.


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## cremeegg (10 Jul 2017)

Brendan Burgess said:


> The critical point here is that pension pots valued at €2 million or more are subject to a “super tax” rate of 70 per cent.
> 
> A TD is treated as being well under this threshold but a private sector employee with the same pension entitlements is over the limit and liable to “super tax”.






Duke of Marmalade said:


> The "super tax" is an anomaly which no one is meant to incur.
> 
> It's an anomaly for sure but not evidence of a wicked conspiracy against the private sector.



Can someone explain, is the cut in point for the super tax different between public and private sectors or not. Thanks


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## cremeegg (10 Jul 2017)

Duke of Marmalade said:


> Rather than everyone being on DC pensions everyone should be on DB.  The market is incapable in today's conditions of delivering that which points to the State underwriting longevity improvements and even investment return and inflation.  A society where middle income retirees are required to manage multi million euro pots is so terribly inefficient.



Absolutely disagree.

A defined benefit pension is a lie.

The employer offering it has no idea if they will be able to honour the terms of the scheme 50 years into the future.

It is no good to the employee because they must always doubt that the promise will be defaulted on.



Duke of Marmalade said:


> A society where middle income retirees are required to manage multi million euro pots is so terribly inefficient.



As for efficiency they could outsource the management to professional investment managers.

As to bearing investment risk in their pensions, well that risk exists anyway, but with a defined pension scheme the employers has promised to bear the risk. A promise they do not know that they can keep.


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## jjm (10 Jul 2017)

cremeegg said:


> I have always believed that the generous PS pension arrangements arose because Trade Union negotiators were able get them past politicians who knew that the costs would not materialise until long after they themselves had left the scene.
> 
> There is no cost to any current administration in agreeing a pension benefit which will not become due for many years. An easy sop to the unions.


cremeegg
There are more people in unions in the private sector than in the public service actually 5 or 6 100% more in fact
, Think about the shelving of the car park tax it was not the unions who got it shelved it was pressure from head of departments who got it suspended quitely/not intelimented
,These pensions originally designed for themselves ,If the were funded the same as the private sector DB and capped there would be on problem,
Lots of  good well ran DB pensions schemes Buy an annuity for each person who retires so it is very easy to control and see cost,
State Sponsored Bodies DB schemes already show the way,


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## Duke of Marmalade (10 Jul 2017)

_creemegg_ the rules for the 'super tax' are the same it's just that no one in Public S gets high enough a pension to incur it.  No one in the Private S should put so much into their supplementary pension fund that it incurs the super tax.


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## cremeegg (10 Jul 2017)

jjm2016 said:


> cremeegg
> There are more people in unions in the private sector than in the public service actually 5 or 6 100% more in fact



True, however private sector employers are not so quick to make promises about future costs.




jjm2016 said:


> Lots of  good well ran DB pensions schemes Buy an annuity for each person who retires so it is very easy to control and see cost,



The problem arises long before any annuity needs to be bought.

An new employee in their 20s is promised a pension 40 plus years in the future, to run for who knows how long. 

The investment environment in those 40 years is completely uncertain.

DB pensions are simply a lie. The extraordinarily strong investment climate in the 80s means that those retiring until recently were not caught out.


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## jjm (10 Jul 2017)

Duke of Marmalade said:


> _cremeegg_ you think the State can guarantee to pay pensions 50 years into future?
> 
> DB provides huge societal benefits in terms of generation pooling of longevity and investment risks.  There is no point a punter handing the management of these risks to a professional, that's what I mean by inefficient.
> 
> The capital required for the risks involved are proving beyond the appetite of the market.  The State should get involved in mitigating the extreme risks. For example if folk live far longer than anticipated it is Society's problem.


Would I be correct in saying you did an example of the cost some time in the past year I remember seeing it .I did notice a few bad mistakes that is why i remember seeing it,


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## cremeegg (10 Jul 2017)

Duke of Marmalade said:


> _cremeegg_ you think the State can guarantee to pay pensions 50 years into future?



No I don't think that the state can deliver any such guarantee. That is why I agree with Brendan that all PS pensions should be DC.



Duke of Marmalade said:


> DB provides huge societal benefits in terms of generation pooling of longevity and investment risks.  There is no point a punter handing the management of these risks to a professional, that's what I mean by inefficient.
> 
> The capital required for the risks involved are proving beyond the appetite of the market.  The State should get involved in mitigating the extreme risks. For example if folk live far longer than anticipated it is Society's problem.



I agree with your concerns here, however I don't see DB pensions as a solution. I see them as a cover-up to hide the problem. We are saying to PS workers that they will receive 40/80s when they retire, linked to ongoing salaries. everyone knows that this is unlikely.

I accept that pooling of longevity and investment risk may be desirable, though surely a DB scheme may, depending on its members age profile, do the opposite. e.g. if lots of people retire now that focusses investment risk on future retirees. 

Not in the public sector case of course because there is no investment risk, there is nothing invested to be at risk.


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## Duke of Marmalade (10 Jul 2017)

jjm I don't do mistakes but if you point out one of my 'mistakes' I will show you your mistake.


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## jjm (10 Jul 2017)

Duke of Marmalade said:


> jjm I don't do mistakes but if you point out one of my 'mistakes' I will show you your mistake.



 I would never say I don't do mistakes if you re post we can check where I got it wrong,


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## Firefly (10 Jul 2017)

I am intrigued Duke, I would also welcome the input from those of a left-leaning disposition who often claim that private enterprise are just chasing profits. Would they prefer that all workers have a defined benefit pension from the state coffers, to, you know, make it fairer?

Btw, how's that pinkometer going?


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## Duke of Marmalade (10 Jul 2017)

_Firefly_ the Pinkometer exploded whilst endeavouring to make a reading on _BigShortt_.


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## jjm (10 Jul 2017)

Now leave TheBigShort out of it at least he knows when he is walking on egg shells,


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## Deiseblue (10 Jul 2017)

Firefly said:


> I am intrigued Duke, I would also welcome the input from those of a left-leaning disposition who often claim that private enterprise are just chasing profits. Would they prefer that all workers have a defined benefit pension from the state coffers, to, you know, make it fairer?
> 
> Btw, how's that pinkometer going?


 Oh you mean like the contributory & non contributory State pensions payable to all citizens on attaining the appropriate age ?

Of course in the case of public sector workers such state pension is integrated whereas a large number of private sector workers will receive the state pension in addition to their occupational pension.


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## jjm (10 Jul 2017)

jjm2016 said:


> We would all be better off public and private sector if the Government took a % of what they take each week from our wages in prsi and ring fenced into a fund to pay the long term requirements of both groups of workers
> 
> Hopefully It will not affect me I will be drawing state pension in less than 2 years I also have a private pension which the company paid 2/3 of the cost  this brings my pension well over what i would get for the same wages in the public service I would have contributed around the same % as as a public servant
> 
> ...


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## cremeegg (10 Jul 2017)

Duke of Marmalade said:


> _creemegg_ the rules for the 'super tax' are the same it's just that no one in Public S gets high enough a pension to incur it.



Well according to BB above, a TDs pension is high enough to incur the supertax but because of the way it is valued by Revenue it does not

I actually think I know the answer to this one, bit I don't work in pensions so of course I m not an expert, and I am going to put you to the trouble of explaining it.


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## Deiseblue (10 Jul 2017)

Hopefully FG won't spend the proposed " Rainy Day Fund "

How on earth then are we going to recapitalise our errant Banks when they inevitably screw up again , after all the National Pension Reserve fund cannot come to the rescue again after it was cannibalised to bail them out previously.


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## cremeegg (10 Jul 2017)

Deiseblue said:


> Hopefully FG won't spend the proposed " Rainy Day Fund "



One of the first things Leo said he was going to do.

https://www.irishtimes.com/news/ire...bn-rainy-day-fund-on-infrastructure-1.3148810

And no money has even been put into the fund yet.


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## Duke of Marmalade (11 Jul 2017)

_cremeegg_ if a mid ranking financial services retiree had the same DB pension as a TD they would be treated exactly the same.
The example is for the totally unreal situation of a DC punter who had accumulated enough to buy an annuity at today's ludicrous pricing


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## Firefly (11 Jul 2017)

Deiseblue said:


> Hopefully FG won't spend the proposed " Rainy Day Fund "



Apparently FF are in favour of this Rainy Day fund, which means they are probably hoping to win the next time and have a nice pot for all sorts of spending fun & games. Where's RainyDay to comment when you need him!


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## Firefly (11 Jul 2017)

Deiseblue said:


> Oh you mean like the contributory & non contributory State pensions payable to all citizens on attaining the appropriate age ?


Yeah I know. One thing though, the idea of a Basic Income has been knocked around for years now, but we essentially have this via the OAP



Deiseblue said:


> Of course in the case of public sector workers such state pension is integrated whereas a large number of private sector workers will receive the state pension in addition to their occupational pension.


I agree, and for those on very low incomes it's not worth much, but for anyone earning over 60k there is a big difference, which would cost a lot of money to fund privately.


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## cremeegg (11 Jul 2017)

Duke of Marmalade said:


> _cremeegg_ if a mid ranking financial services retiree had the same DB pension as a TD they would be treated exactly the same.
> The example is for the totally unreal situation of a DC punter who had accumulated enough to buy an annuity at today's ludicrous pricing



So its not that public sector pension pots are taxed differently, its just that DB pension pots are valued in such a way that a DB pot which would provide a large pension is valued less than a DC pot would provide the same pension, thus escaping the supertax. 

Of course public servants have DB pensions, convenient.

You continue to represent current interest rates as "artificial" and "ludicrous" well they have been around nearly 10 years now. And I see from another thread that BOI fixed term rates for 10 years are barely above 2 year rates. So somebody expects them to be around for another 10.


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## Gordon Gekko (11 Jul 2017)

Going forward, a multiple of 30 is applied to a DB pension accrued post-2014.

So take someone on a pension of €60k who gets a lump sum of €180k. His benefits are worth €1.98m which is fine.

I'm not convinced that overfunding is pointless. The big advantage of pensions is the gross roll up. Penalty tax is arguably a fair price to pay for having a large sum of money compounding tax-free for a very long time


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## Duke of Marmalade (12 Jul 2017)

Gordon Gekko said:


> I'm not convinced that overfunding is pointless. The big advantage of pensions is the gross roll up. Penalty tax is arguably a fair price to pay for having a large sum of money compounding tax-free for a very long time


I have done the sums.  Overfunding is effectively incurring 50% tax on total fund (40% relief in and 70% deduction out).  We can compare this with investing in an 8 yearly roll up fund subject to 41% exit tax. The break even point is 47 years.


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## Gordon Gekko (12 Jul 2017)

Are you sure that you're calculations are correct?

Say I'm 35;

I'm going to overshoot €2.15m. I can invest €100 in my pension now or invest €60 in a fund. The €100 compounds tax-free for 30 years. The €60 does not (I lose 41% on income and every eight years I lose 41% on gains). Then I get hit with penalty chargeable excess tax at 65. But say I have €1m of excess monies and pay €400k of penalty tax. The €600k is still in a tax-free environment (the ARF) and can compound for thelonger of my life or my wife's life (hopefully 35 years).

Are you sure your model is right? It's only 70% tax if you exhaust your ARF.


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## jjm (12 Jul 2017)

Gordon Gekko said:


> Are you sure that you're calculations are correct?
> 
> Say I'm 35;
> 
> ...





Gordon Gekko said:


> Are you sure that you're calculations are correct?
> 
> Say I'm 35;
> 
> ...



Dukes model is always correct,


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## Duke of Marmalade (12 Jul 2017)

GG well you are introducing a further dimension viz. the favourable estate planning of an ARF.

Exit Tax funds compound gross over 8 year periods - both income and gains.

I assumed a gross return of 40% per octannum in doing my sums.  _jjm_ asserts that my models are always correct.

But an Exit Tax fund is a very poor comparator.  Best would be a direct fund oriented towards long term capital gains.


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## jjm (12 Jul 2017)

Duke do you ever wonder why the public service way of calculating contributions are always 100% incorrect


Duke of Marmalade said:


> GG well you are introducing a further dimension viz. the favourable estate planning of an ARF.
> 
> Exit Tax funds compound gross over 8 year periods - both income and gains.
> 
> ...


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## jjm (12 Jul 2017)

Duke do ever wonder why the public service way of  calculate contributions are always 100% incorrect


Duke of Marmalade said:


> GG well you are introducing a further dimension viz. the favourable estate planning of an ARF.
> 
> Exit Tax funds compound gross over 8 year periods - both income and gains.
> 
> ...


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