Big contributory pension changes on the way
There has been a significant change to the way some contributory pension entitlements is calculated, following last week’s announcement by the Department of Employment Affairs and Social Protection. Entitlement to the State Contributory Pension depends on having paid PRSI. For those reaching pension age on or after April 6, 2012, at a minimum, the individual must have a total of at least 520 full-rate and modified rate contributions paid.
This is equivalent to 10 years of PRSI payments. Additionally, the individual must have started paying PRSI prior to reaching 55 years of age.
The amount of pension that a person is entitled to is based on a rather complicated arrangement.
Ireland bases entitlement to state pension (contributory) on the annual average number of social insurance contributions, recorded over the duration of a person’s working life.
This is called the “yearly average” and is calculated by adding together the social insurance contributions paid and credited by a person over their working life, and dividing that number by the number of years between when a person first paid social insurance, and the last full contribution year before reaching pension age.
The problem with this arrangement is that in many cases, and most commonly in the case of women, where a person commenced working, and paid PRSI in an insurable employment, and subsequently left the workforce (usually to rear their family, Chartered tax adviser Kieran Coughlan, Belgooly, Co Cork. (086) 8678296 or because they were obliged to leave their employment when they got married) may have big gaps in their social insurance record. Where there are large gaps in a person’s social insurance record, their average PRSI contributions calculated over the total time from first entering service can be quite low, meaning they qualify for a reduced pension.
Take for instance a person who worked for 10 full years from 17 to 26 years of age, and who subsequently retires at age 66.
They would have paid 10 years of PRSI out of a total maximum working lifetime from first entering service of 48 years.
Under current rules, the person would qualify for a pension of €95.20 per week. Contrast this scenario with a person who first paid PRSI at the point of reaching 55, and continues to pay PRSI for ten consecutive years.
The current PRSI rules suggest that this person has a full PRSI record, having paid PRSI every year since they first entered insurable employment, and would (under current rules) qualify for a full pension of €238.30 per week. The unfairness of this system was addressed to some degree by the home-makers’ scheme introduced in 1994, which allowed persons to have certain years disregarded, where they had left their employment to provide fulltime care for a child aged under 12, or an ill or disabled person aged 12 or over. By having years disregarded, under the home makers’ scheme, a calculation of the average PRSI contributions paid would yield a higher result, which could ultimately mean a higher pension payment.
While there certainly is merit in the homemakers’ scheme, it did not serve as useful to those persons who stepped out of the workforce prior to its introduction in 1994.
The current averaging basis of assessing a person’s pension entitlements is set to change significantly, as the Government plans to put in place a Total Contributions Approach for all new pensioners from 2020. Under these new rules, a person will need to have paid or credited contributions for a full 40 years in order to qualify for the full state pension. Credited contributions will be available for a period/s of up to 20 years of homemaking and caring duties. Persons who would benefit from this new system, most commonly women who gave up work to raise a family, and more especially those who did so prior to April 1994, may benefit substantially from the new rules, as up to 20 years of credited contributions can be factored in under the Total Contributions Approach. For existing pensions, there will be no reductions in pension payments as a result of these changes.
For pensioners who have reached pension age since September 2012, or who are expected to reach pension age prior to 2020, they will have the opportunity to have their pension entitlement assessed, either under the existing rules (yearly average method), or the total contribution method, and will get paid the higher amount with legal effect from March 30, 2018.
It will take a number of months for the Department of Employment Affairs and Social Protection to come to terms with this change. Application forms for any pensioner seeking a review are to be issued in the autumn, and backdated top-ups (where applicable) will likely be made in early 2019 (backdated to March 2018, where relevant). Farmers and their spouses who are not yet retired should consider carefully how the new changes will affect their pension entitlements, and would be well advised to obtain relevant advice on m a x i m i s i n g th e i r p e n s i o n entitlements.