Big con­trib­u­tory pen­sion changes on the way

Irish Examiner - Farming - - FARM FINANCE - Kieran Cough­lan www.cough­lanac­count­ing.com

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.

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