I’ve just been reading about the contributory State pension changes that will be phased in by 2034.
As I understand it, people who reach retirement age after that date will need to have 40 years of contributions to qualify for the State pension.
As someone who worked “cash in hand” for unscrupulous employers in my early 20s when I was more naive, I’m concerned that I would fall just short of the magic 40 years by then.
I’m fortunate to have started a private pension, but I was only able to afford that in my late 40s so it might not grow enough to live on.
I’m also thinking of people who left the workforce because of illness (as my wife had to) or to raise children or care for family members. How will the changes affect us?
Concerns about qualifying for the full State pension have become “increasingly common”, particularly due to the changes referenced by the reader, according to financial adviser Daniel Hardiman.
One of the most common pension mistakes people make is “assuming their State pension will automatically fall into place at 66”, according to Hardiman, who is managing director of Hardiman Life & Pensions in Tuam, Co Galway.
He notes a lack of awareness surrounding the total contributions approach (TCA) by 2034, which can result in a reduced State pension.
Under this system, pensions are calculated based on the total number of PRSI contributions built up across a working life, with around 40 years of contributions required to qualify for the full rate, he says.
“However, having fewer than 40 years does not mean someone loses the pension entirely. Instead, the pension is paid on a sliding scale depending on the number of contributions built up.”
He notes that not all gaps in a PRSI record automatically reduce a pension, saying those who cannot work due to illness, like the reader’s wife, may receive credited contributions which help to protect their entitlement.
Similarly, he advises parents who leave the workforce to raise children to consider the HomeCaring Periods Scheme, which recognises periods of up to 20 years spent caring full-time for children under the age of 12.
“One of the most important things people can do is check their PRSI record early. Too many people only discover gaps when they apply for their pension at 66, when it can often be too late to address them,” he says.
Those worried about falling short may consider delaying taking the State pension, with rules allowing them to defer and continue working until the age of 70.
While this can result in a higher weekly pension when it is eventually claimed, the numbers “often don’t stack up”.
“Deferring means giving up several years of pension payments in exchange for a relatively modest increase in the weekly pension later.
“When the maths is done, it can take many years for the higher pension to make up for the income lost by delaying,” he says.
Anecdotally, he says, most pension advisers believe the vast majority of people are opting to claim their pension at 66.
Noting that Irish workers can buy back missing years in the UK’s pension system, he says it is generally not possible to do so in the Republic, saying PRSI is “designed to reflect actual participation in the workforce”.
“So if contributions were not paid at the time, for example because someone was working cash in hand, those years usually cannot be added retrospectively,” he says.
There is a limited exception, however, through voluntary PRSI contributions he says, which are largely intended for people who leave insurable employment early and wish to maintain their record.
“To qualify, you generally need to have built up at least 10 years of paid contributions and apply within a limited period after leaving work,” he says.
He advises the reader to request their PRSI contribution statement through MyWelfare.ie, which is the “quickest way to understand where you stand”.
“Many people only discover gaps when they apply for their pension at 66, when it can often be too late to address them.”
“It is also worth reviewing how your private pension is invested and the charges that apply, as these can make a significant difference to how much your savings grow between now and retirement.”
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