State Pension (Contributory) Update

State Pension (Contributory) Update

There are two different State Pensions systems, namely the Social Insurance system and the Social Assistance system.

The Social Insurance system provides pension benefits based on an individual’s PRSI record over their lifetime whereas the Social Assistance system provides means tested pension benefits.

Herein we are going to look at the State Pension (Contributory) which falls under the Social Insurance System and as outlined above is based on an individual’s PRSI contributions over their lifetime.

We hope to outline below the conditions which must be satisfied in order to qualify for this pension by addressing the main questions which will arise for individual’s looking to qualify for this benefit. Please note that this is for guidance purposes only and individuals should get clarification of their own entitlements from the Department of Social Protection.

For the purpose of this article we have looked at this matter from the point of view of an individual who has not yet reached age 66. It does not cover any other social welfare payments/allowances.

Who Qualifies for the State Pension (Contributory)?

In order to qualify, an individual must have a certain minimum “yearly average” number of weekly PRSI contributions in the appropriate PRSI class.

The main sectors of the employment who can potentially qualify for the Pension are private sector employees (PRSI Class A), public service employees recruited after 6th April 1995 (also PRSI Class A) and self-employed sole traders, partners, and proprietary directors (PRSI Class S). Those who pay PRSI under Classes E, F, G, H and N are also eligible.

The main category of workers who don’t qualify for the State Pension (Contributory) are public service employees recruited before 6th April 1995 (PRSI Class B, C & D).

However, it is important to note that Individuals who have spent part of their working life in the public service paying social insurance contributions (PRSI Class B, C & D) and part in the private sector paying social insurance contributions (PRSI Class A, E, F, G, H, N and S) are deemed to have a “mixed insurance record” and may still qualify for the State Pension Contributory on a pro-rata basis.

For individuals who have worked in Ireland and one or more other EU states, the Social insurance contributions paid in these EU States, can be added to your Irish social insurance contributions in order to qualify for the State Pension (Contributory).

Ireland also has bilateral social insurance agreements in place with Canada, the USA, Australia, New Zealand, Japan, Republic of Korea and Quebec. These agreements generally provide that social insurance contributions paid in Ireland and the other country can be combined to help people qualify for the State Pension (Contributory). In general, the method of calculation is similar to the EU rules.

Due to the complexities involved, Individuals who hope to qualify for the State Pension (Contributory) on the basis of “mixed insurance records” or social insurance contributions paid in other states should contact the Department of Social Protection to determine their entitlements for this pension.

In order to qualify for some level of benefit an individual must satisfy the following conditions:

  1. They must have started paying PRSI before age 56, and
  1. They must have paid at least 520 weekly contributions, of which no more than 260 of the 520 may be voluntary contributions (a lower limit for voluntary contributions applies if a person commenced making voluntary contributions before 6th April 1997), and
  1. An individual must satisfy the average yearly contribution limit which can be satisfied where:
  • They have paid a yearly average of at least 48 paid credited or full-rate contributions from 1979 to the end of the tax year before they reach age 66; or
  • They have paid a yearly average of 10 or more credited or full-rate contributions weekly contributions from 1953 (or the time they started insurable employment, if later) to the end of the tax year before they reach age 66.

For the purpose of calculation the average contribution for full year is 52 weeks.

 What age can benefits be accessed?

The benefit is payable from a retirement age as determined by the Department of Social Protection. This retirement age has been increased in recent years and could yet be subject to further increases in the future. The situation as things stand is that for those born in the years prior to and including 1954 the benefit is payable from the date of their 66th birthday, for those born between 1955 and 1960 the benefit is not payable until they reach age 67 and for all those born in 1961 and thereafter the benefit is not payable until their 68th birthday.

 How is the benefit to be paid currently calculated?

The State Pension (Contributory) is payable in three distinct elements:

  • A personal amount.
  • An increase for a qualified adult.
  • An increase for each dependent child.

The personal amount of the State Pension (Contributory) varies by the yearly average number of PRSI contributions (paid or credited) by the individual over their working lives.

Where an individuals spouse/civil partner or qualified cohabitant has the required PRSI contribution record then they may of course qualify for the State Pension (Contributory) personal amount in their own right. However where they do not qualify for the State Pension (Contributory) they may receive a benefit based on the calculation for a qualified adult.

Where an individual is receiving the State Pension (Contributory) the Increase for a Qualified Adult is automatically paid directly to the adult dependant.

When determining the increase in payment for an adult dependant (qualified adult), the income of the individual receiving the State Pension (Contributory) is not taken into account in the assessment. Any income the adult dependant has from employment, self-employment, savings, investments and capital (for example, any property except principal private residence) is taken into account. Where that individual has jointly held savings or investments with their spouse, civil partner or cohabitant only half is taken into account.

The table below sets out the rates of pension payable based on the yearly average of PRSI contributions.

 

State Pension (Contributory) rates in 2017
Yearly average PRSI contributions Personal rate per week Increase for a qualified adult (under 66) Increase for a qualified adult (over 66)
48 or over €233.30 €155.50 €209.00
40-47 €228.70 €147.90 €198.60
30-39 €209.70 €140.80 €188.40
20-29 €198.60 €131.70 €177.30
15-19 €152.00 €101.30 €135.70
10-14 €93.20 €61.80 €84.10

There are also increases in this payment for each dependent child.

A dependant child is normally a child who lives with the individual and has yet to reach their 18th birthday except where the child is in full-time education, in which case they continue to be deemed a dependent child up to 22 years of age or until the academic year in which they reach 22.

The Full Rate increase per child equates to €29.80 per week.

An individual cannot claim an Increase for a dependent Child with the State Pension (Contributory) where their spouse, civil partner or cohabitant has an income of over €400 a week.

Where that spouse, civil partner or cohabitant earns between €310 and €400 a week they can qualify for the half rate of €14.90 per week.

Extra benefits

You are automatically paid an extra allowance of €10 per week when you reach 80 years of age. This increase is not paid to qualified adults.

The Living Alone Increase may be payable to people who live completely alone. You may also be eligible for other benefits for example medical cards, the Household Benefits Package and Fuel Allowance.

How is the “Yearly Average” calculated?

This calculation should be done by first determining the number of contribution years, beginning with the year the social insurance contributions commenced and ceasing on the last full contribution year before reaching age 66.

These are referred to as ‘Total Contribution Years’.

Full rate paid contributions and credits over the same period are then counted. These are referred to as ‘Contributions and Credits’.

The ‘Yearly Average’ is calculated as follows:

 

Yearly Average = Contributions and credits/Total contribution years

The yearly average is used to get the rate band and the corresponding weekly rate of pension as set out in the table.

Example:

A person has paid social insurance since 1st January 1967. They reach age 66 on 12th March 2017. The last full contribution year before they turn 66 is 2016. In this example the individual has a total of 1,260 contributions and credits which count towards the State pension (contributory).

Total Contribution Years = 50 (1967 to 2016 inclusive)

Contributions and Credits = 1,260

Yearly Average = Contributions and credits/Total contribution years = 1260/50 = 25.

In this example using the rates table from above table, this would qualify a person to a weekly personal rate of €198.60.

Is the State Pension (Contributory) Taxable?

If the individual has no other income, then the level of State Pension will be below the income exemption limit for Income Tax purposes, and so no income tax or USC will be due.

Where the individual has other income which pushes total income for the individual above the exemption limit for Income Tax purposes, all income will be taxable under PAYE with income tax and USC levied as applicable (No PRSI).

There is an income tax exemption available for individuals age 65 and over, currently subject to below limits:

Single/widowed/surviving civil partner: €18,000

Married or in civil partnership:                    €36,000

For those with dependent children, the exemption is increased by €575 for each of the first two children and by €830 for each subsequent child.

Where an individual’s income is not much above these amounts, they may get what is called “marginal relief”. That means that they do not go back into the normal tax system – instead they pay tax at a rate of 40% on the amount by which their income exceeds the relevant exemption.

The point at which marginal relief ceases to be of benefit in terms of tax paid varies with an individual’s circumstances and the tax credits to which they are entitled. Depending on the level of income above the exempt amounts it may be more beneficial to use the normal ‘tax credits’ basis. Where any clarity is required in this regard at retirement, individuals should contact their local Revenue office.

How to confirm eligibility and benefits under the State Pension Contributory System?

The Department of Social Protection do not provide information on possible future State Pension Contributory entitlements, or comment on individual pension planning enquiries.

They recommend that individuals attempting to calculate their future State Pension Contributory entitlements should first request a copy of their social insurance record as currently held by the Department.

This can be posted out to individuals who request a copy:

  • online via welfare.ie;
  • by telephoning LoCall 1890 690 690 or + 353 1 471 5898 from outside the Republic of Ireland, or
  • by writing to:

The Department of Social Protection

Client Eligibility Services

McCarter’s Road

Ardarvan

Buncrana

Co. Donegal

Once received the department recommends that possible future State Pension Contributory entitlements for an individual should be determined by reviewing this social insurance record in conjunction with the information on the eligibility conditions and current payment rates for the State pension (Contributory) as per the frequently asked Questions and Answers section on www.welfare.ie .

Going Forward – Issues and Concerns with the State Pension System

It is important to note that State pension entitlements will be assessed on the basis of the eligibility conditions applicable on the date the claimant reaches pension age.

Under the National Pensions Framework, it is proposed to change the PRSI “yearly average” contribution test to a “total contributions approach”.

It had been suggested that this new approach would allow for benefits to be calculated on an N/30ths basis for clients qualifying for the State Pension (Contributory).

In other words 1/30th of the maximum rate of pension would be payable for each full year of PRSI contributions paid or credited, with a full pension payable only to those with 30 years PRSI contributions paid or credited.

This new approach is currently being designed by the Department of Social Protection. It is expected that the “total contributions approach” will replace the current “yearly average” approach by 2020.

The hope is that under this new approach the number of PRSI contributions recorded over a working life will be more closely reflected in the rate of pension received.

For those with shortfalls in contributions at pension age it is proposed that they will be allowed to continue to make contributions to make up any shortfall and an actuarial increase will be paid from the date of claim.

As this is a very significant reform with considerable legal, administrative and technical issues to be ironed out, we can expect much discussion around this matter in the coming years.