Will I lose my right to the State pension if I give up my job to look after my kids at home?
Published 27/09/2015 | 02:30
I am a mother of three young children. I have decided to give up my job so that I can look after my children at home. Does that mean I will lose my right to the State pension?
Kim, Portmarnock, Co Dublin
No - you will not lose your right to a State pension. About 20 years ago, the Department of Social Protection introduced a homemaker's scheme, which was designed to make it easier for people who care full-time for children or for an incapacitated person to qualify for a contributory State pension.
To qualify for the State contributory pension, you must have built up a minimum yearly average number of social insurance contributions since entering social insurance to reaching pension age.
Under the homemaker's scheme, years spent working in the home while caring on a full-time basis for a child up to 12 years of age or an incapacitated person aged 12 or over will be disregarded when calculating a person's yearly average number of social insurance contributions.
A year is disregarded as a home-making year if a person is out of the workforce for the complete year. A maximum number of 20 home-making years may be disregarded for State contributory pension purposes.
Before you decide to give up your job, it is important to realise that you are unlikely to be able to continue to contribute to any pension you currently have in work.
This means you could be entirely depending on the State pension when you retire - unless you have already built up a substantial pension in work. The maximum State contributory pension is currently €230 a week.
My father has just turned 60 and he wants to retire next year. He has a defined contribution pension scheme through work but his normal retirement age under that scheme is 65. The value of the fund is currently €150,000.
At 65, he would be entitled to take up the equivalent of one-and-a-half times his salary as a tax-free lump sum. His company advised him that if he retires at 61, this will reduce the maximum lump sum he can take. He has over 20 years of service with this company.
Is that correct? And if so, what kind of tax-free lump sum would he be entitled to if he retired at 61? And how would that compare to the one that he'd be entitled to if he retired at 65?
Aisling, Letterkenny, Co Donegal
the options for tax-free cash on retirement from a defined contribution pension arrangement are as follows - one-and-a-half times your salary or 25pc of the pension fund.
To be able to claim one-and-a-half times your salary, you must be retiring under "normal retirement" rules and have a minimum 20 years of salaried service. In your father's case, he meets the 20 years' service rule but as the "normal" retirement age on the scheme in question is age 65, your father is deemed to be retiring early.
Your father's tax-free cash using the one-a-half-times-salary method will be calculated by using the fraction of his actual service over his potential service - and multiplying this fraction by one-a-half times his final salary. Actual service is from the date a person joined the company until they leave the company or retire. Potential service is taken from the date someone joined the company until the "normal" retirement age of the scheme. These will always be different if someone is retiring early, just like your father is.
Let's assume your Dad has 22 years of service when he retires next year on his 61st birthday. Your father's actual service will be deemed to be 22 years and his potential service up to the date of "normal" retirement will be deemed to be 26 years. The calculation to determine your father's tax-free cash will be calculated as follows: 22 divided by 26 - multiplied by one-a-half times his final salary.
If your father remained in employment until the age of 65, his actual and potential service would be one and the same, therefore allowing him to take the maximum tax-free cash - that is one-a-half times final salary.
To avoid having the early-retirement reduction factor applied to you father, there a few options available to him.
One: He should ask his employer if the trustees could change the retirement age on his existing scheme from 65 to age 61. This will only be possible if the scheme is a standalone executive pension scheme arrangement and his employer and trustees of this scheme agree to it.
In theory, if the scheme was a group pension scheme, a change in the retirement age would still be possible but unlikely as all members would be able to avail of the early retirement and this would have implications for his employer.
Two: If his employer and/or the trustees won't agree to a change in his retirement age, ask them would they agree to him transferring the benefits of his pension to a standalone executive pension scheme arrangement.
This way, he can set his own retirement age - again with the permission of the employer and the trustees. If there are risk benefits attached to his existing scheme, careful consideration needs to be given to this option as these benefits may not be replicated by his employer onto his new arrangement - therefore leaving him exposed until he actually retires. His employer may also be willing to continue with any employer contributions into this new arrangement.
Three: If neither of these two options is possible and your father doesn't want to have his tax-free cash reduced in line with the early-retirement rules, ask him would he consider taking the 25pc tax-free cash option instead.
The downside of this option is that the tax-free cash amount may not be as big but the balance of the fund can be used to either purchase an annuity or invest in an Approved Retirement Fund (ARF) or an Approved Minimum Retirement Fund (AMRF) - or a combination of both. (Both ARFs and AMRFs are personal retirement funds, where you can keep the money in your pension fund invested after retirement). This is on the assumption that the rules of the scheme permit access to an ARF or AMRF arrangement.
With the one-and-a-half times salary option, the remainder of the money in the fund (after the tax-free lump sum is taken) must be used to purchase an annuity.
Considering how low annuity rates are at the moment, it might be a better option for your father to consider taking less tax-free cash at retirement but as a result end up having greater control over the investment of the balance of his fund - by using the ARF/AMRF option.
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While we will endeavour to place your questions with the most appropriate expert to answer your query, this column is a reader service and is not intended to replace professional advice.
Principal, PML Financial Planning
Sunday Indo Business