Making sense of how you calculate your entitlement to a State pension is a source of frustration for many people. It doesn’t help that Government has changed the rules several times – or that there are currently two separate ways of assessing your entitlement that can throw up significantly different figures.
Worse still, there are multiple different classes of PRSI, 11 of them I think, each with their own rules and entitlements. We’ll focus here on Class A contributions, which are those most commonly paid by those in PAYE employment.
Getting a handle on what you can expect to receive is important. More than one in five working age people say they intend to rely solely, or mostly, on the State pension for their income in retirement.
If you include those who currently have no private pension plan and don’t know what they will do for money when they finish working, the figure goes up closer to 30 per cent. And that’s before you look at those who do have private pensions but have pencilled in the State pension income as a core element of their retirement planning budgets.
So what are you entitled to? And how can you work it out?
The State pension in Ireland pays between €5,512 and €13,795 a year, depending on your contributions to the pot during your working life.
There are, as I said, currently two different ways this entitlement is calculated – “yearly averaging” and total or “aggregate contributions”. Both require that you have a minimum of 10 years of contributions – 520 stamps – and that you start paying PRSI in Ireland before the age of 56.
Yearly average is the system that has been in place for many years. It works by looking back at your entire working life – from the point when you made your first PRSI payment. It tots up the total number of your weekly contributions in that time and then divides that by the number of years in your working life.
For a full pension, you will need a yearly average of 48 PRSI payments or higher. The calculation includes both paid PRSI stamps and credited contributions, which can be added to your record if you are in receipt of certain unemployment or illness payments.
But if you started work in a student job at 17, took time out to go to college and maybe travel, or to have a family, you could find yourself struggling to get a full pension.
In fairness, the “loss” is buffered to some degree by the way the system was “banded”. Thus, if you have an average of 40 PRSI contributions a year, you’ll still get 98 per cent of the full weekly pension. That falls to 90 per cent for those with an average of between 30 and 39 stamps a year, and to 85 per cent if your average is between 20 and 29.
Below that, it drops to 65 per cent of the full pension for those with between 15 and 19 PRSI payments a year, and to 40 per cent for anyone with an average of between 10 and 14 payments over every year of their working life.
The Government also introduced a Homemaker’s scheme in 1994. It essentially disregarded years during which a person was out of the workforce to care for a child under 12 or an older person in need of full-time care – but only from 1994 onwards. So, if you started work at 16, meaning your yearly average of PRSI stamps was assessed over 50 years, but spent 20 years (the maximum allowed) out of the workforce for homemaker duties, your average would be assessed over 30 years.
Only full years out of the workforce were disregarded though you were credited with PRSI contributions for part years out of the workforce for homemaker obligations.
To address some of the anomalies of the yearly average approach, the Government has introduced a different way of measuring social insurance contributions – the total contributions approach.
The main difference here is that it does not matter when you first made a PRSI payment or how many years you worked: it cares only about how many contributions you have made over your working life.
For a full pension, you need 40 years of contributions – or 2,080 paid or credited weekly contributions. Again you can avail of credited contributions. You can get up to 20 years of contributions credited under the Homecaring Credit for years out of the workforce looking after children under the age of 12 and anyone above that age in need of full time care and attention because of disability or age.
This is similar to the Homemaker’s scheme under the yearly averaging approach, with the added benefit that it does not apply only to time taken out of the workforce after 1994 – the limit that applies to Homemaker’s.
You are also entitled to claim up to 10 years in other credits – for periods of unemployment etc. However, the total you can use between Homecaring and other credits is capped at 20 years – or 1,040 weekly credits.
If you do not have the full 40 years’ credits, your pension will be paid on a pro-rata basis. So if you have 27 years of credits, you will get 27/40ths of the full pension – or €179 a week at current rates which is €9,312 a year.
The new system, which has been in place for just over five years now, is seen as fairer as it decides your pension on the basis of your actual PRSI payment record not simply on how condensed your working life has been.
So why have the old system still in place?
Well, it was supposed to be phased out over a period of time but that has yet to happen. And the yearly averaging system does work better for some people. For instance, you can get a full pension with just 10 years of contributions as long as those are the 10 years before you hit the State retirement age of 66.
So if you arrive in the State at 55 and work for the next 10 years you can get a full pensions under yearly averaging, while someone who has a 50-year working life because of a student job at 15 will fare worse – one of the key anomalies that led to the introduction of the newer regime.
The other beneficiaries will be some of those with low contributions. If you have 10 years of contributions over a 40 year working life, you will get a pro rata payment of 25 per cent of the full pension under the newer total contributions calculation – or €41.33. Under the old system, where the payments were banded, you would get €106 a week.
The good news is that while both systems continue to operate side-by-side, the Department of Social Protection will calculate your benefit under each approach and pay your pension on the basis of whichever one is more beneficial to you financially.
It is no harm to check on your PRSI record well in advance of retirement to make sure the Department of Social Protection’s record – the final word in these things – chimes with your understanding of your payments history, i.e. that your employer paid over the stamps that they were deducting from your pay.
If you have a MyGovID, you can access your PRSI record at mywelfare.ie here. If you don’t have a MyGovID or do not wish to sign up for one, you can contact the PRSI records team at Department of Social Protection, McCarter’s Road, Ardaravan, Buncrana, Co Donegal, or by phone at (01) 471 5898 or 0818 690 690
And if there are gaps, and you have the financial wherewithal, you can make voluntary contributions to top up your record as long as you are no longer subject to compulsory PRSI deductions or currently in receipt of credited contributions.
You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed our last newsletter, you can read it here. Also, to ensure you continue to receive On The Money, be sure to add the email address you receive the newsletter from to your safe senders list.
