You’ve taken time out of the workforce to raise your family, but may now be wondering how this is going to impact your entitlement to a State pension.
Well, the good news is that while the State pension scheme may be convoluted, a little bit of preparation and knowledge can help you increase your weekly payment in retirement. This can be a substantial difference. Over 20 years of retirement there is a difference of some €155,064 between the lowest (€99.20) and the highest rate of the State pension (€248.30).
So it’s worth taking some time to figure out your own situation.
Homemaker schemes
The first thing to note is there are two schemes in place to ensure that you won’t lose out if you take time out of the workforce to care for your children.
Introduced in 1994, the Homemaker’s credit means that the years you are out of the workforce won’t be counted when it comes to working out your State pension contribution, which can help improve your entitlement to a maximum State pension, under the averaging rule. This approach means that you must have a yearly average of at least 10 qualifying contributions paid or credited, from the year you first entered insurance, to the end of the tax year before you reach pension age.
You may need to register for this scheme. If you claim child benefit, then you will have an automatic entitlement to the scheme. However, if child benefit is paid to the mother, then the father will have to register for the scheme. For fathers who haven’t done this, the Department of Social Protection says a claim may be backdated, provided the person can provide “good cause for delay”.
You can register here.
HomeCaring Periods Scheme
The alternative route to working out your entitlement is through the new HomeCaring Periods scheme, which has come about as a result of the move to a new way of calculating your entitlement to the State pension, the total contributions approach (TCA).
Under TCA, you need to have 2,080 or more social insurance contributions (or 40 years of full-time employment) in order to qualify for a maximum personal rate of the State pension.
The HomeCaring Periods Scheme makes it easier for people who take time out of their working life to care for children or adults to qualify for a contributory State pension.
Under the Scheme, periods of time when you were caring for someone can be included in your social insurance record.
You can get a HomeCaring Period on your social insurance contribution record for each week you were not employed or signing on for credits and you were providing full-time care for a child under 12, a child over the age of 12 who needed an increased level of care, or an adult who needed an increased level of care.
Up to 1,040 HomeCaring Periods (equivalent to 20 years) may be included on your social insurance record.
With this scheme, you apply once you reach pension age.
You’ll be eligible for both schemes if you’re a stay-at-home parent, caring for a child/children, under the age of 12. It’s important to note that you can’t opt for a mixture of the two; you have to go for one or another.
The schemes work by making sure that your time out of the workforce doesn’t reduce your entitlement to a State pension. If Homemakers wasn’t in place for example, and you spent 15 years caring for your family, you would end up with a lower average (as you would have no PRSI stamps during these years), and therefore a lower pension, upon retirement. You are entitled to have up to 20 of these years disregarded.
With respect to the TCA approach, you will get Homecaring credits if you opt for this approach. For example, if you had 1,560 contributions in total, made up of HomeCaring Periods and credited contributions, you would be entitled to 75 per cent of the pension (1,560 / 2,080 = 75 per cent). This means a payment of €186 a week, rather than the full payment of €248.30, based on today’s rates.
Go back to work?
Once your youngest child turns 12, you can no longer benefit from the above schemes. So, to keep up with your State pension entitlements, you’ll have to either go back to work, or elect to make voluntary contributions.
Should you go back to work once (or before) your youngest child turns 12, you will start paying PRSI again, and will thus start contributing again towards your State pension. Should you continue to work until retirement, you may find that you will be entitled to a full State pension, as your years spent caring for children won’t disadvantage you in this respect.
But what if you only go back to work in a small capacity? Under the averaging approach, if you work at least one day a week, and earn more than €38 a week gross, or €5,000 a year if self-employed, then you will be earning weekly PRSI stamps. And this counts even if you don’t actually pay any PRSI. For example, earnings up to €352 a week are exempt from PRSI. However, as employers pay PRSI on these earnings, you will be building up an entitlement to the State pension, even if you aren’t paying any PRSI yourself.
Give up work
What if you’re self-employed and earning less than €5,000 a year, or if you only return to the workforce briefly, before giving up work again?
Then you could consider making voluntary contributions to boost your chances of a State pension.
To be eligible to make such contributions, which start at €500 a year, you must have worked full-time for at least 10 years, and have at least 520 weeks PRSI paid. In addition, you must apply within 60 months (five years) after the end of the contribution year during which you last paid PRSI, or were awarded a credited contribution.
This may exclude some stay-at-home parents depending on how long out of the workforce they have been.
According to the Department, “in very exceptional circumstances, this period may be extended at the discretion of the Minister”.
There are three different rates: 6.6 per cent, which has a minimum annual payment of €500 and applies to most workers; 2.6 per cent for civil servants, which has a minimum annual payment of €250; and a flat rate of €500 for those who were previously self-employed.
You can elect to start making voluntary contributions immediately after your last PRSI contribution, or, potentially, from the start of one of the years in the previous five-year period.
For example, someone who is subject to the 6.6 per cent rate, will be charged 6.6 per cent of any reckonable income they may have in the preceding year. So, on income of €10,000 for example, they will be charged €660.
Reckonable income is “all income derived from any employment, including any trade, business, profession, office or vocation”.
With no income, they will pay the €500 minimum rate.
Making a voluntary contribution can help you qualify for a pension at a higher rate. For example, five years of voluntary contributions would cost you €2,500 but could push you into a higher yearly average.
As the difference in the weekly rate between someone with 20-29 yearly average contributions, and 30-39 contributions, is €11.80, over 20 years this equates to a benefit of some €12,272 – significantly more then, then the cost of the aforementioned voluntary contributions.
Consider the example, of someone who works full-time from the age of 22-32, then takes 15 years out of the work force to raise their children, and benefits from Homemakers scheme. At the age of 47 they go back to work full time, but then stop working again at age 52. They then wish to make voluntary contributions towards the State pension until retirement age.
According to the Department of Social Protection, this person would have 10 years of Class A PRSI paid, their 15 years with a family would be covered under home making or home caring provisions; they then have a further five years of Class A PRSI, while from the age of 53 to the State pension age of 66, they benefit from Class V PRSI.
“Such a record would translate to a full State Pension (Contributory),” a spokeswoman for the Department says.
The contributions have cost the person €6,500 (€500 x13) but they now have a full State pension.
It’s worth remembering that making voluntary contributions would only be worthwhile if it will push you into a higher qualifying category for the State pension. It needs some consideration then.
No entitlements
If you don’t have enough credits, and you’ve left it too long to make it up with voluntary contributions, you may still be entitled to a State pension.
This is because you may qualify for a non-contributory pension, or a payment related to your partner’s State pension, if you have one, known as a qualified adult increase. However, both of these are means tested, which means that depending on your family’s income and assets, you may not qualify.
