Are Single Public Service top ups even worth it?

[Bluecup]

Hi All

I'm in the Single Public Service since 2018 and immediately set up a PRSA AVC with Davy to allow for further contributions. It was an easy decision at the time as there was n pathway to 'buy years' in the SPS at that time. Fast forward to today and the mechanism exists. Now I'm wondering which is the better option. There are definite advantages to adding to the SPS ,e.g. in a recessionary year growth is 0%, never goes into negative but the additional contributions just seem so expensive.

Has anyone done the maths for AVC vs SPS additional contributions? Which way did you decide? For me, I made an injury time contribution at the end of October to my Davy PRSA AVCs up to the 20% allowed at my age for 2019 as I just wasn't confident in the SPS calculations.

 

[Ent319]

Hi Bluecup, I've been trying to wrap my head around this as well and from what I can work out it seems like a bad deal.

Because the cost of purchasing pension in the facility and the growth of your investment rises equally with inflation, you're always going to end up getting back exactly what you put in. There isn't really any "growth" on your investment as such once relative purchasing power is taken into account.

So the ultimate question to be answered is: after you retire, does a 1:24 annuity ratio seem like a good deal?

You do get tax relief when you use the facility. Although with the same relief, if you stuck €10000 as pension in a decent equity index fund for 35 years it wouldn't be unreasonable to expect it to grow to about €100,000 before tax.

 

[Ent319]

Actually now that I think about it, the purchase facility seems to be a bit of a con.

You're essentially giving the State your money to buy a product that will only ever grow at the rate of inflation, and which is a bad trade to start off with (roughly 24:1 annuity ratio).

Funnily enough, if you invested your €10000 in equities as pension for 35 years, took that €100,000 and then transferred it to the purchase facility, you'd end up being able to buy more pension through the facility adjusting for inflation than had you invested in the facility thirty five years ago! (assuming purchase facility cost rises proportional to inflation)

 

[Bluecup]

Ent, I'm starting to think the same way. I actually inquired about how I go about making additional payments at work in October and they said nobody else had even asked yet (approx 400 staff) so I don't think there is that much interest out there.

 

[Ent319]

Yeah unless I've fundamentally missed something here the purchase facility seems to be a trap.

There also seems to be a nasty trick that's pulled if you leave the public service with less than nine years FTE service (see circular). You lose any benefits you've purchased through the facility and any payments you've made are refunded at the price you paid for them at the time they were purchased, with no interest payable. This means if you leave the public service before nine years have passed (i) you've gained nothing from your money being "invested" all that time (ii) you lose money in real terms because the refunds don't account for money's devaluation over time through inflation. This doesn't apply if you purchase benefits by way of transfer from another pension fund, rather than purchasing them directly.

Edit: Am I right in thinking the refund might have tax implications too? You'd have to pay back whatever tax relief you got from revenue on the contributions!