Ways to ensure you do not lose out on the full state pension
Published 18/05/2014 | 02:30
Surviving on the state pension of €230 a week would be a shock to anyone who has earned the average wage – or more. It would be an even bigger blow to have to get by on a smaller state pension of €92 a week – a position you could find yourself in if you spent time travelling around the world or looking after children at home.
There are two types of state pension – a contributory pension and a non-contributory pension. As the contributory pension is not means-tested, it is probably the easier one to get. However, to be eligible for the contributory pension, you must have paid 520 social insurance contributions since you started working. As you typically get one social insurance contribution for each week worked, you typically need to work for 10 full years (or 520 weeks over your working life) to reach the 520 limit.
On top of this, you must also have built up a yearly average of social insurance contributions. This yearly average is calculated from the date you first started working – regardless of whether your first job was a casual part-time gig in your teens or the launchpad for your career.
"There are a number of reasons why people only qualify for a reduced contributory pension," said Pensions Ombudsman, Paul Kenny. "Reduced pensions are normally paid because the average annual contributions are not enough. You may have paid a bunch of social insurance contributions when 16-years-old and working in a café for the summer. After that, you might have gone to college or travelled abroad for some years before you returned to work – so there could be a big gap in your social insurance record."
It is this gap in your social insurance record which could eat into the value of your state pension. A long gap will reduce the average amount of social insurance contributions you paid a year over your lifetime – which would in turn slash the pension you're entitled to. You need to have a yearly average of 48 social insurance contributions to qualify for the full contributory state pension of €230 a week. If your yearly average is only 14, you will only qualify for a pension of €92 a week.
The type of social insurance contributions paid also come into play. Ordinary workers in private employment typically pay Class A contributions while the self-employed pay Class S – while both of these count towards the contributory state pension, there are other types of social insurance contributions which don't.
In 1994, the Government introduced a scheme which makes it easier for stay-at-home mums or dads to qualify for a contributory state pension.
The scheme, known as the homemaker's scheme, ignores any years spent looking after children in the home when working out your yearly average of social insurance contributions. Without the scheme, a parent would build up a gap in their social insurance record for their years at home – which would in turn eat into the size of the contributory state pension they would be entitled to.
The main drawback of this scheme is that it does not cover any years spent looking after children before April 6, 1994. "A lot of people fall outside the scheme because the caring took place before 1994," said Mr Kenny.
You will not qualify for the homemaker's scheme if you are looking after children over the age of 12 – unless those children are ill or disabled.
If overseas travel is behind the gap in your Irish social insurance record, the contributions paid in another country might be taken into account for your state pension here – depending on where you travelled. For example, social insurance contributions paid in Australia, Britain, France, Spain and Germany can count towards your Irish State pension – but this is unlikely to be the case if you travelled in Russia, the Middle East or certain Asian countries.
You can make voluntary social insurance contributions should you decide to leave work for any reason. This will prevent you building up a gap in your social insurance record, thereby protecting your state pension. However, you must start to make your voluntary contributions within a certain time of leaving work.
If you don't qualify for a contributory pension, you may be eligible for a non-contributory state pension of between €219 and €229 a week, depending on your age. You must pass a means test however to get the non-contributory pension. Any shares, investments and investment properties you own will be taken into account for this means test – as will any income earned by your spouse.
You should be entitled to a widow's, widower's or surviving partner's state pension should your spouse or partner pass away. To qualify for the contributory pension, your spouse must have built up enough social insurance contributions – otherwise, you must pass a means test to get the non-contributory pension.
Out of work
You won't necessarily build up a gap in your social insurance record if you become unemployed, sick or retire early – you may qualify for 'credits' similar to the social insurance contributions you paid while working. Credits are usually awarded at the same rate as your last social insurance contribution. These credits protect your entitlement to a state pension in the future.
Don't rest on your laurels
It would be unwise to give up work or stop signing on simply because you've built up enough social insurance contributions for the state pension – and you believe your yearly average will be high enough by the time you retire.
About 12 years ago, you needed 260 paid social insurance contributions to qualify for the state pension – you now need twice that. "Do not stop working or signing on to get your pension credits," said Mr Kenny. "It's conceivable the 520 limit could be increased in future years.
"Furthermore, the higher your yearly average, the more likely you are to get a better pension. Anyone who stops working or signing on because they've built up 520 contributions is very foolish."
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