The Irish contributory State pension is reasonably generous by international standards. For example, at its current maximum rate of €299.30 weekly, or €15,563.60 annually, it compares favourably with the UK maximum rate of £241.30 (€282.32) a week or £12,547.60 (€14,680.69) annually. However, in the UK, 35 years of qualifying contributions are required to reach the maximum, while in Ireland 40 years are needed.
More pertinently, the value of the pension to the individual isn’t quite so good. That is the proportion of average earnings represented by the pension, otherwise known as the replacement rate. According to Rav Vithaldas, partner and pensions assurance leader at EY Ireland, that replacement rate is one of the lowest in the OECD, “estimated at 33.7 per cent for average Irish earners compared to a 63.2 per cent OECD average”.
The situation is even worse for those without the full 40 years or 2,080 reckonable PRSI contributions required for the maximum. Under the total contributions approach, they will receive a proportion of the maximum depending on how many reckonable contributions they have, subject to a minimum of 520. This does not mean that people need to have been in paid employment for the full 40 years, however.
“They may include paid PRSI, up to 520 credited contributions and up to 1,040 HomeCaring Periods,” says Vithaldas. “Credits and HomeCaring Periods are subject to a combined maximum of 1,040.”
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There are other ways to increase the contributions number. “Individuals who do not qualify for a full contributory pension should first review their contribution statement for missing payments, PRSI credits, HomeCaring periods, Long-Term Carers contributions and contributions made in the UK, EU or countries covered by Irish social-security agreements. Correcting or combining these records may increase the pension rate,” Vithaldas says.
People can make additional contributions by continuing to work and deferring their pension between ages 66 and 70, he adds. “Those who stop working may make voluntary contributions, generally only if they already have 520 paid contributions. Therefore, voluntary PRSI can improve an existing record but normally cannot solve a shortfall below the initial 520-contribution threshold.”
Of course, the best way to make up for any shortfall or to increase retirement income is by planning ahead through an occupational pension, PRSA or MyFutureFund.
An interesting innovation was introduced to the State pension system in 2023. This allows people to defer claiming the pension at age 66 and receive an increased payment rate of just under 5 per cent for each year of deferral until age 70.
The question is whether this represents a good deal for the pensioner.
“Since January 2024, people born on or after January 1st, 1958, can claim their contributory pension at any age between 66 and 70,” Vithaldas says. “However, the income forgone during deferral means that it can take more than two decades to recover the missed payments, resulting in a relatively late financial break-even point.”
Deferring to 67 means foregoing approximately €15,564 to gain about €733 annually, with recovery around age 88, he says. “Waiting until 70 sacrifices approximately €62,254 but provides an additional €3,359 annually, again producing break-even around age 88–89. These calculations exclude tax, future pension-rate changes and any improvement obtained through additional PRSI contributions.”
Of course, there are circumstances where it might suit certain individuals to exercise the deferral option. “Deferral may nevertheless suit someone who remains employed, does not need the pension immediately, expects a long retirement or can use additional PRSI contributions to improve an incomplete record,” says Vithaldas. “It provides a higher guaranteed income throughout later life, helping to protect against the financial risks associated with living longer. Claiming at 66 may be preferable where income is needed immediately, health is uncertain or the individual expects to obtain greater value from receiving and saving the pension earlier.”
In other words, the deferral option doesn’t really represent that good a bargain for most people, but if you are in the fortunate position of not really needing the money and enjoying very good health, it just might work out for you. For the rest of us who do need the money, the message is clear: check your contributions record early and take steps to maximise your State pension. And join a workplace scheme or MyFuture Fund, or take out a PRSA to top up the pension when you retire.
