I have a question about the new total contributions approach for State pension calculation. How exactly will it work? I understand that it will be based on total contribution accredited but how can I get an idea of how much you will get if you don't have 40 years of contribution?
Will there be a rate band like for the yearly average rule?
Mr D.S., email
The Government has been talking about changing the way we qualify for the State pension for more than a decade. For reasons that I simply cannot explain, they have yet to do so fully, although they did introduce the concept of assessing eligibility to a pension by virtue of the total number of contributions you pay over a working life back in 2018.
The position, as of now, is that their are two systems – the “old” yearly average approach and the newer, total contributions, one.
Under the old system, you are measured by the average number of PRSI contributions you have from the time you started working until you reach retirement age. You must have a minimum of 10 years of contributions (520 weekly payments).
If you fall short, as you say, there are rate bands to determine the payment you get. With an average of 48 stamps or more a year, you get the maximum rate of €248.30. This falls by €5 a week for anyone with an average of between 40 and 47 stamps a year.
The amount is lowered in bands then for anyone with an average in the 30s, in the 20s, between 15 and 19 and, finally, between 10 and 14 contributions a year where you will get roughly 40 per cent of the full payment.
The winners under this system are people who started working in Ireland later in life – ideally just 10 years before retirement age, where they would qualify for a full pension despite barely meeting the minimum criteria.
People who started working early in life but subsequently took time out of the workforce – especially women to raise families – suffered.
You can still qualify for a pension in that way. The Government was finally supposed to have consigned this approach to history last year but as with so many things, it hasn’t yet happened.
Total contributions approach
The plan was for the total contributions approach (TCA) to become the only way of assessing pension eligibility – but the Government did reserve the right to change the rules from those in place on a “temporary” basis since 2018 to ease the position of many people whose pension had been badly affected by changes back in 2012.
For anyone who retired after the end of August 2012, they will be assessed under the yearly averaging system above and also the new TCA, and they will receive a pension on the basis of whichever system benefits them more.
The TCA approach doesn’t worry about when you started work. That student job will not come back to haunt you. As set out currently, its only concern is whether you have 40 full years of contributions – 2,080 weekly contributions – by the time you reach pensionable age, currently 66. There is talk this contributions figure could be lowered when the system formally takes over as the sole approach, but we just don’t know yet.
TCA allows more leeway for breaks from the working world. For instance, you can use up to 10 years of credited, covering for instance periods when you might be unemployed and claiming unemployment benefit.
More importantly – especially, though not exclusively – for women, you can claim up to 20 years of credits for any period you took out of employment to care full-time for family under the age of 12, or to care full-time for an older person incapable of fending for themselves.
You can also mix and match credits under these two headings. So, you might have 12 years looking after your child and another five years of credits while on unemployment benefit, giving you a total of 17 years of credits.
There is a limit, however. You cannot claim 30 years of credits and provide only 10 years of working payments. The maximum number of credits usable in hitting the 40-year target is 20 years, regardless of which heading they fall under.
Pro rata pension
Turning to bands, I can see why this might be an issue as it has never been outlined in relation to the total contributions approach – and that is because they do not exist under TCA.
Instead a straightforward pro rata arrangement will come into play if you do not have the full 40 years of contributions. Infuriatingly, all the Revenue Commissioner and Department of Social Protection scenarios presume that you will have convenient full years of credits or paid contributions but that's not the case for many people.
To figure out your entitlement on the basis of the current rules, you simply divide your number of contributions by 2,080. So if you have 20 years of paid contributions, that will be 1,040 contributions (52 x 20). Dividing 1,040 by 2,080 gives you 0.5, so you will get a half pension – or €124.15 at today’s rates.
As you can see, that will leave you worse off almost certainly than under the current scheme where, even with an annual average of just over 15, you get paid €161.80. An average of 15, for comparison, is just over 11½ years of PRSI stamps over a 40 year working life.
If you worked just over 24 years, say, 1,260 contributions, and were getting unemployment benefit for, say, 20 months (34 credits) and then illness benefit for a year (52 credits), you would have a total of 1,346 contributions. Dividing this by 2080, gives you an indexation factor of 0.647.
Multiplying the maximum pension payment (€248.30) by 0.647 gives you €160.65, and that’s what you’d receive by way of weekly pension.
Open to change
However, as I stated above, it is entirely possible that the politicians will change the rules before making the TCA approach applicable to all workers. For instance, they could decide that you only need 30 years (1,560) of contributions for a full pension, or 35 (1,820).
This is largely a political matter and as successive governments have shown, Irish pensions are a deeply political matter.
That figure would then become the one by which you divide your own number of contributions. Clearly, any decision to reduce the threshold for a full pension from 40 years would increase the amount of pension a person would get under the pro rata arrangement.
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
