* Hello again. This week, we’re responding to a reader who is somewhat alarmed at news that there are going to be changes in how the State pension is calculated. What exactly is happening? What will that mean? And when?

Every year, almost without fail, the Minister for Finance will announce in the budget an increase to the State pension and give a figure for what that pension will now be. Most of us, if we think about our future pension at all, simply bank this number and assume we will get whatever that figure is at the time we retire. But that’s not necessarily so.

Your entitlement to a contributory State pension is based on the number of social insurance (PRSI) payments you have made during your working life. You need a certain number to qualify for a minimum State pension (a figure well shy of the one the Minister mentions every year) and a higher number to secure the maximum pension.

If you don’t meet the minimum threshold, you will need to see if you qualify for a non-contributory State pension, which pays slightly less, but which is determined by a means test, not by your social insurance record.

On the Money: the personal finance newsletter from The Irish Times

---

Christmas dinner for under €35? We went shopping to see what the grocery shop really costs

---

One in four PAYE workers are overpaying tax. Can you claim money you’re owed?

---

Typical price paid for home by first-time buyer up €88,000 on five years ago

---

To further complicate matters, there are currently two ways of calculating your entitlement to a State pension. The first, the method that has been used for many years, is called yearly averaging.

Yearly Average

Under this approach, the Department of Social Protection looks at when you started paying PRSI and then at how many weekly PRSI payments you have made by the time you hit 66 (or up to 70 if you choose to defer drawing down your pension under an option introduced last year).

* It then divides your PRSI payments by the years worked to get an annual average. So if you started working as a 16 year old student in 1974 and are retiring at 66 this year, they will look at the 50 years from the year you turned 16 to the end of 2023 – the last full tax year before you reach pension age.

To get a full pension – currently €277.30 a week, rising to €289.30 from January – you need to have a yearly average of 48 contributions or more, which means pretty much full employment over that time.

If you fall below this figure, you will get a reduced pension. The figure dips only slightly (to €271.90 a week) for anyone with an average of 40 to 47 weekly contributions per year but drops off more steeply after that. If you have an average of 10 weekly social insurance payments a year over your working lifetime, you can qualify for the minimum payment of €110.80 a week.

You need to have a minimum of 10 years of payments as well – 520 weekly PRSI stamps. This is to ensure someone does not start paying social insurance very late in life and still get a full State pension.

There is also a separate “alternative average rule”, under which you will qualify for a full pension if you have 48 Class A (the most common), E, F, G, H, N or S stamps a year since the 1979-80 tax year. This might help someone who did some part-time work in their teens before going to college and then returned to the workforce later. It is all or nothing: either you hit the average of 48 or more under this calculating or it is void and you rely on the normal averaging rule.

Every stamp counts as the annual averages are rounded up or down. If you have an average or 39.4, you are rounded down to 39 and qualify at the moment for a weekly pension of €249.30; if your average is 39.5, it is rounded up to 40, raising your weekly payment to €271.90. And that gap will stay in place throughout your retirement.

That’s a difference in income of over €1,175 a year, or €21,150 over the balance of a woman’s life on the basis of current expected longevity. For men, the figure is a more modest €16,450 as they tend to die younger but it does show the importance of tracking down every relevant PRSI stamp. You can get a copy of what the Department of Social Protection has on your record through mywelfare.ie.

For all the tweaks, the yearly averaging system still does unfairly advantage those with a limited social insurance record. You could arrive in Ireland at 55, work for 10 years and get a full pension where someone who has worked for 40 years may not if they have gaps in their PRSI record – something that is especially an issue for women who have traditionally been expected to take time out of work for child-rearing and family care.

However, if you have had to take time out of work since 1994 either to care for a child under 12 or for an older person who is ill or disabled, you can at least discount those years from your work record for the purposes of yearly averaging under what is called the Homemakers’ Scheme. It is open to women or men but only one person per household can claim for the same time.

You can use the scheme to excise up to 20 years from your work record for PRSI purposes. You don’t get stamps for these years but by removing the time from your record, it increases your chances of qualifying for a State pension or securing payment at a higher rate as your PRSI payments are now spread over a shorter period.

Total Contributions

Recognising the fundamental unfairness of the averaging rule back in 2018, the Government introduced an alternative way of calculating your entitlement to State pension. This is called the “total contributions approach” or, alternatively the “aggregated contributions method”.

It’s a much simpler approach. There is no averaging or anything like that You simply tot up all the PRSI stamps you have paid over your working life. To get a full pension, you need to have 2,080 weekly PRSI payments – equal to 40 years of work.

If you started working at 16 and those 2,080 contributions cover 50 years of work, no matter. Once you hit that figure, you get the full pension. Anything less than that and your pension is cut pro rata.

So, if you had paid 1,900 PRSI stamps over your working life, you would divide that figure by 2,080 and then multiply the answer by 100 to find out what percentage of the full pension you would get. In this case, 1,900 / 2,080 X 100 = 91.346. This is rounded to two decimal places, so the final answer is 91.35 per cent. So, in this example, the pension payable would be €253.30, which is 91.35 per cent of the weekly maximum of €277.30.

There is still a base: you must still have at least 10 years of contributions – a minimum of 520 stamps – to be eligible for the contributory state pension no matter how it is calculated.

What about people who take time out for family caring duties, or other enforced absence, such as unemployment?

You can continue to get PRSI credit for homecaring periods – time out of work to care for children under the age of 12 or those who are incapacitated (either by disability or age). Unlike the average system where homemaker’s simply ignored that time, you will get a stamp for every week spent homecaring up to a maximum of 20 years of PRSI – 1,040 stamps.

You can also include up to 10 years in credited PRSI stamps for periods when you are out of work because of unemployment or illness, or various other scenarios.

However, between them, the maximum contribution to your calculation from Homecaring and other credited contributions is 20 years. So if you were Homecaring for the 20 years and subsequently out of work ill for a year, just 20 of those 21 years will count in determining whether you have hit the 2,080 target.

As a system, it is fairer because your pension is paid pro rata for the years you worked. You are not disadvantaged compared to someone who comes late into the system. And your time caring for the family is treated exactly the same as that same time spent at work by another person.

Until now, your PRSI record was assessed using both methods – three if you include the alternative average system – and you were paid a pension on the basis of whichever calculation was most favourable to you.

Changes in 2025

So, to bring us right back to the reader’s original query, what’s changing now?

It was always intended to eventually replace yearly averaging with total contributions but, as so often in these things, it has taken a lot longer than expected. The argument was made that to act quickly would unfairly disadvantage people who had made life and career decisions on the basis of the rules originally in place.

Finally, in 2025, we are taking the first step along this path. But it is just a small first step.

As before, the Department of Social Protection will crunch the numbers under both the total contributions approach and yearly averaging. If total contributions delivers the better outcome, you go with that.

If, however, yearly averaging delivers a better return, things are changing.

The Department will take 90 per cent of what you would get under yearly averaging and 10 per cent of what you would receive under total contributions, and that will make up the pension you get.

So let’s take the example of someone who has just 22 years of PRSI contributions by the time they retire, for whatever reason, but those 22 years were spread over the 26 years running up to retirement age.

On the basis of total contributions, they have just over half of the 40 years’ contributions required for a full pension, so they qualify for 55 per cent of the €289.30 full pension rate that will be in place next year (1,144 PRSI stamps / 2080 X 100 = 55) – or €159.12.

Under yearly averaging, they have an average of 44 PRSI stamps per year since they started paying social insurance. That would entitle them to a pension of €283.90 a week at present, which is higher.

So the department takes €255.51 (90 per cent of the pension they would get under yearly averaging) and €15.91 (10 per cent of the pension due under total contributions to give them a weekly pension of €271.42, slightly below what they would have got on a full yearly averaging pension but above what they could have expected under total contributions.

The 90:10 split is just for 2025. Over each of the following years, the ratio will change. So someone with the same work record as our example above who first claims their pension in 2026, will get 80 per cent of what they were due under yearly averaging and 20 per cent of the total contributions rate.

And so it goes on. In 2027, the split is 70:30, going to 60:40 in 2028 and so on. By 2033, a person applying for their pension for the first time, whose circumstances were as above, would get just 10 per cent of what they were due under the higher yearly averaging calculation and 90 per cent of the total contributions outcome.

Anyone applying for their pension in 2034 and beyond will be assessed purely on total contributions. The thing that determines your calculation is the year you apply for the pension.

At that point, the system will be simpler as there will only be one way of calculating entitlement, and fairer. People who start paying PRSI late in life will lose out and those who are working – or homecaring – for longer will get more.

Hopefully that all makes sense.

* This article was amended on Thursday, December 12th, 2024

You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.