How does State pension take account of time spent working in EU?

I read your piece about pension eligibility with great interest. While you covered women taking time out of employment to raise children and how they can claim their insurance weeks, I was wondering what happens if you have lived abroad for an extended period of time?

I know that, within the EU, it’s possible to include the equivalent PRSI contributions but I’m not entirely sure how it works. Can you address this aspect as I know many people returning to live and work in Ireland who have spent a decade or so abroad.

Ms R.P., email

It’s a good point. So often we look at how certain personal financial arrangements work in Ireland, forgetting that, for many people, that is only part of the picture.

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Emigration has meant that, traditionally, Irish workers are more mobile than those from many other countries. The more mobile nature of the modern workforce has only added to this scenario. The result is that there are many people approaching retirement who have been paying social insurance to a number of different countries over their working life.

Taken individually, such as under the Irish yearly averaging system where you need 10 years’ PRSI contributions (520) to qualify for a contributory State pension, such a person might not qualify for a pension here solely on the basis of their Irish work record.

A lot of other countries have similar qualifying restrictions – 15 years in Spain apparently, and five in Germany to name just two – so it can be very confusing to an individual.

However, one of the advantages of the European Union is that you automatically – well, almost automatically – get credit for PRSI or equivalent payments made in any EU state.

The outcome is that even though you would not qualify for a state pension here (or maybe elsewhere) on the basis of local payments, you will be entitled to a pension from one or more states based on the portion of your working life spent there.

Aggregation rules

So how does it work?

If you are living in Ireland, your first port of call is the Department of Social Protection. If you are elsewhere in the EU, you contact the local equivalent.

The department will check your record and, if your last employment was here, they take control of the process: if you most recently worked elsewhere before returning to Ireland to retire, the department will forward your claim to that country.

So the country in which you last worked is the one responsible for gathering all your social insurance records from the other EU member states.

There are also minimum periods of social insurance required by many countries before they will consider processing a pension. In the case of Ireland – and quite a few others – you will need a minimum of 52 weeks of PRSI contributions before the State will address a pro rata pension payment.

Of those 52 weeks, at least one must be in paid employment. The others can be credited.

This 52-week threshold is entirely separate from the 520-week minimum required to qualify for an Irish State pension. We’ll return to that larger number in a minute.

If you don’t meet this 52-week “entry” threshold, don’t worry; credit for that work won’t be lost but will “transfer” and be taken into account in the calculation of your pension by the countries where you worked longer, the EU says.

So the country managing your state pension calculation tots up all the social insurance contributions you have and comes up with a theoretical amount of credit you would have if all that time was worked in the one country. Let’s say, for argument’s sake, that you have worked most recently in Ireland for eight years (416 weekly PRSI contributions) but that you previously worked in Spain for 20 years (1040 contributions) and France for 12 years (624 contributions).

As your most recent employment was here, it’ll be the Department of Social Protection dealing with the case – even though, at 416 contributions, your Irish social insurance record does not in itself qualify you for a pension here because it is short of the 520 contribution minimum.

But when the department tracks down your French and Spanish records, it confirms you have, in fact, made 2,080 social insurance payments over your working life.

That’s well above the 520 minimum, but the Irish Social Insurance Fund does not suddenly find itself bearing the full cost of a pension that it would not have paid at all on the basis of your Irish work record. Instead, it works out, pro rata, what each country should pay you.

To do this, each country uses the same formula: (A x B) / C.

A is that rate of payment you would be entitled to in that country if all your contributions were local. B is the number of weekly contributions paid in that country and C is the larger total number of contributions across all EU states.

Calculation

Let’s use Ireland as an example. As we said last week, for anyone retiring since September 2012, the Department of Social Protection assesses their pension entitlement against two separate systems: the old yearly averaging one and the more modern total contributions approach.

Under yearly averaging, the department notes that your first PRSI payment was back in Ireland as a student, aged 18. So it assesses your 2,080 EU-wide contributions against a working life of 48 years and decides you have a yearly average of 43 contributions a year.

I know I’m rounding up and down here to even years rather than fractions of years, but there are enough numbers to confuse readers without further complication. The Department will work to the precise week/month.

Anyway, with a yearly average of 43 stamps, you are entitled to a weekly pension in Ireland of €243.40, just shy of a full pension. So that 243.4 equals A. B in this case is the 416 contributions you paid in Ireland and C is the total of 2080 contributions. So you have (243.4 x 416 ) / 2080.

(243.4 x 416) is 101,254.4. Dividing this by 2080, you get 48.68, so the Irish State will pay you a pension of €48.68.

Under the newer total contributions approach (TCA), the figure is slightly different because your 2,080 EU-wide contributions equals 40 full years of social insurance and, under TCA, that would entitle you to a maximum weekly pension of €248.30 if the stamps had all been paid in Ireland.

So your formula is now (248.3 x 416) / 2080. And that gives you a weekly pension here of €49.66. As the Irish State has committed to paying under whichever approach benefits the individual, you would have an Irish weekly pension of €49.66.

The same formula applies to other countries. The state pension agencies in each of them would assess what you would be entitled to for the stamps you paid in each of their countries. Clearly, they would not measure your entitlement against the €248.30 or €243,40 that the Irish system would pay you for 2,080 contributions over a working life but on whatever their own pension payment for that social insurance record would be.

In this case, you would likely receive state pension payments from three different countries.

Apply in advance

One important thing to note is the time this can take. It is strongly advised that you apply for a pension at least six months before you are due to hit retirement age, especially where there are any complications such as finding and collating the necessary documentation across multiple jurisdictions.

It can take a lot longer than you might think.

Another issue people often forget is that different countries have different state pension ages. In most cases that age is rising – something we are having an ongoing debate about in this State – but at present it can range from just over 62 in Slovakia to 67 in Greece and Italy.

This is important because, if you’ve worked in, say, Italy, the Department of Social Protection will use that record to assess your overall eligibility. But if, as a result, it is determined that you are entitled to a pro-rata pension in both Ireland and Italy, you will not start receiving payment of the Italian pension until you turn 67 even though you might receive the Irish pension at 66.

Finally, the rules on working with countries outside the EU vary depending on the relationship Ireland has with them. That’s something we might return to in the coming weeks.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into