Better to defer Service Purchase?

K

kevmac

Guest
Great forum. I’m posting in the hope that somebody can help me decide if I should buy 2.85 years under the civil service notional service purchase scheme. I am 32 years old and have 10 years service under my belt. I need to buy 2.85 years to give me full pension at age 60. This is all assuming, of course, that I stay in the public sector. I am currently working in higher education.

Current Salary: € 54,394
Service to date: 10 years
Service to go to age 60: 27.15 years
Shortfall at age 60: 2.85 years

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Calculations Provided by my HR Dept
Cost to purchase 1 Year
0.14% of Gross Pensionable Pay (€54,394) +
1.08% of Nett Pensionable Pay (Gross Salary less twice the Old Age Retirement Pension (€54,394.00 - €21,767.20 = €32,626.80))
€54,394 x 0.14% x 2.85 Years = € 216 per annum
€32,626 x 1.08% x 2.85 Years = €1,003 per annum
= €1,219 per annum to purchase 2.85 years

Pension and Gratuity based on current salary and 37.15 years = €26,035 (pension) & €75,783 (gratuity)
Pension and Gratuity based on current salary and 40 years = €27,197 (pension) & €81,591 (gratuity)

Therefore, extra pension = €1,162 p.a. and extra gratuity €5,808

Total Outlay based on current salary (before tax relief) = 27.15 years x €1,249 = €33,909

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According to everything I have read here, NSPs seem very good value. Should I purchase these additional years now?

I decided to plug some figures into the pensions modeller on www.cspensions.gov.ie (Figures vary a little from what my HR dept gave me, but I'm assuming this is related to when they calculated etc)

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Taking a DOB of 1 April 1975, 10 years service and buying 2 years 311 days
The cost of purchasing one year is 0.14% of Gross full-time salary plus 1.13% of Net full-time salary

The cost of purchasing 2 Years and 311 Days is 0.4% of Gross full-time salary plus 3.17% of Net full-time salary .
Based on the current salary of €54,394 this is equal to a cost of €1,249

27.15 years term cost = 27.15 years x €1,249 = €33,909

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However, if I make myself 5 years older (DOB 1 April 1970) with 5 years more service (total 15) and buying 2 years 311 days
The cost of purchasing one year is 0.16% of Gross full-time salary plus 1.24% of Net full-time salary

The cost of purchasing 2 Years and 311 Days is 0.46% of Gross full-time salary plus 3.54% of Net full-time salary .
Based on the current salary of €54,394 this is equal to a cost of €1,403

22.15 term cost = 22.15 years x €1,403 = €31,075

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Therefore, based on current salary levels it is cheaper to defer. Or, am I overlooking something obvious? (Economic, actuarial or otherwise! I feel I must be!)

Many thanks.
 
You are basing the calcaultion in 5 years time on your current salary.
Assuming that your salary increases about 4% per annum in the next 5 year it will give you a 'current ' salary art the time of about €64k.
The state pension presumably in that time will increase but maybe not at the rate as your salary

So taking that into account, your calculations of what it will cost you in 5 years time are incorrect
 
Blinder said:
You are basing the calcaultion in 5 years time on your current salary.
Assuming that your salary increases about 4% per annum in the next 5 year it will give you a 'current ' salary art the time of about €64k.
The state pension presumably in that time will increase but maybe not at the rate as your salary

So taking that into account, your calculations of what it will cost you in 5 years time are incorrect
Click to expand...

Thanks Blinder. Assuming inflation also rises at the same rate then, would I be best to defer then?
 
kevmac said:
Thanks Blinder. Assuming inflation also rises at the same rate then, would I be best to defer then?
Click to expand...
We would always assume that public service salaries will beat inflation. Plus, if you're on an incremental scale, or get promoted, or start to receive new allowances, your salary will grow even faster. I would always advise public servants who are certain that notional service is appropriate for them to purchase as early as possible.

And do remember that they could raise the rates for notional service purchase again.
 
oysterman said:
We would always assume that public service salaries will beat inflation. Plus, if you're on an incremental scale, or get promoted, or start to receive new allowances, your salary will grow even faster. I would always advise public servants who are certain that notional service is appropriate for them to purchase as early as possible.
Click to expand...
I understand that the rates for notional service are calculated to take account of the fact that a percentage of people will get promoted over time.
oysterman said:
And do remember that they could raise the rates for notional service purchase again.
Yeah, happened about 3 or 4 years ago.
Click to expand...
Or even more recently - June/July 2006, I think?
 
Complainer said:
I understand that the rates for notional service are calculated to take account of the fact that a percentage of people will get promoted over time.
Click to expand...
Even so, you'll still benefit if you're one of the lucky ones who gets a late promotion by virtue of having started the purchase years earlier and, therefore, contributed on the basis of a lower grade salary to draw pension based on the higher terminal salary.
 
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