James Fitzsimons: Rich or poor, State pension is well worth investing in
How PRSI of €4.86 each week can fund a retirement pot worth €12,000 a year
Published 30/12/2012 | 05:00
IF you've weathered the recession and still have a job or a viable business, keep doing what you are doing. Things will get better even if it takes a while before they improve. If you lost your job or your business, hang in there. Take a break from the rat race to organise what slipped when the Celtic Tiger was still alive. Retirement planning is one thing that most people neglect. It's always too far down the road to be a concern. Then one day it is too late.
The State pension is not a lot, but it can be even less than you expect if you don't take steps to protect what you are entitled to. You need a yearly average of 10 contributions for the minimum pension and 48 for the maximum pension. The average is calculated from the time you become part of the PRSI system. If you dropped out of the workforce, without making voluntary contributions, the amount of your State pension in retirement may be cut drastically. But you can take steps to get around the cuts if you know what to do.
For one thing, since 1994, a person who takes time off work to look after a child or other dependent can ignore the years they were out of work when calculating their yearly average PRSI contributions. So the time they spend out of work will not dilute the value of their pension in retirement. This is a very valuable right for those it applies to. You need to return to work for it to be effective.
But even if there is a gap between the time you stop being a carer and when you return to work, you can make voluntary contributions to preserve your full pension rights.
The maximum State pension for an individual is €230.30 per week.
It is increased by €153.50 for an adult dependent under 66 years of age and €206.30 if the dependant is 66 or over. It is not means tested. Millionaires get it as well as the poor. But the increase for dependents is means tested, for those who qualified for a pension since September 1, 2012.
The rich, who qualified before that, will be paid more than those who qualify from now on, even though they might not need it.
If people understood the system a little more they would be outraged at a government that lets such inequality continue. The rich are doing nothing wrong but they are bleeding the system of scarce resources.
Homemakers need to be vigilant as to how their pension rights accumulate. The decision to return to work or make voluntary contributions will impact on what they get in retirement. Those who are out of work and claiming welfare don't have much to worry about either.
Their entitlements are preserved while they are in receipt of benefits from the Department of Social Protection.
The self-employed need to be more careful.
They are not entitled to benefits, so their pension benefits are diminishing while they are not profitable.
But they can make voluntary PRSI payments to preserve their State pension entitlements. Not all self-employed people are entitled to the State pension.
It only became compulsory for the self-employed to pay PRSI since 1988. Those who were over 55 at the time were not required to join the scheme.
If you are self-employed and earn less than €5,000 a year, you are exempt from PRSI. But you can become a voluntary contributor if you make an annual payment of €253. That's cheap to get a pension in retirement of €12,000 a year. You'd be foolish not to pay it. But when the money is not there, what can you do? Beg, steal, or borrow if you want to raise your standard of living in retirement. The Government has cottoned on to the fact that this is a great deal and from 2013 the annual payment will nearly double to €500. You will not buy its equivalent in the private sector.
The welfare system we have doesn't make a lot of sense. It pays pensions and child allowance to those who don't need it, while those who depend on it get less than they deserve. Little and all as it is, the State pension will be more important to more people now than they might ever have imagined. It doesn't matter how much you pay in during your career, whether you are employed or self-employed. It depends on whether you have qualifying contributions throughout that career. Even the minimum voluntary contribution can increase the pension you ultimately get. But you only get one year to make that vital contribution if you are not already liable to pay.
Public servants pay full PRSI if they were recruited since April 1995.
Their State pension becomes an integral part of their public sector pension entitlement. They also contribute towards their public sector pension, but they are paid more than their pre-1995 colleagues to cover the extra pension costs that such recruits avoid. All public servants pay something towards their pensions since the downturn. But most of the cost is taken from general tax revenue. Public service pensions are protected, but they are under threat because we just don't have enough money to pay them.
From 2014, tax relief is due to be cut again for private sector pensions. There is no doubt that a small amount of very wealthy people took advantage of generous tax incentives that once existed.
Now everyone will pay the price for a public administration blunder. But if the privilege of having a pension in the private sector is taxed, the outrageous and unfunded pension rights of politicians and senior public servants must be taxed too. That is the only reason why the changes are being delayed.
The State pension is worth about €250,000 for a single individual, if you satisfy all the conditions. It might be worth a whole lot more. If you have an adult dependant, it is worth twice as much. If pension entitlements continue to grow like they did in the past, it will be worth even more. But if you are outside the system for long enough and don't take steps to keep your benefits, your pension rights could be whittled away, like so many private funds were.
If you are a home carer, see what you can do to maximise your benefits. If you are self-employed, make sure you optimise your benefits. It might mean paying PRSI of €500 a year that you can't put your hands on easily, but it could be the difference between having a pension fund worth €500,000 or €200,000 when you retire. There aren't many things that we can determine with certainty in the economy today, but this is something that can be controlled with a little effort.
You owe it to yourself to make sure you get what you are entitled. You can take steps to secure your rights, but once the time comes to retire there is nothing you can do. Your record will determine what happens.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning