Will you be winner or loser in revamp of State pension rules?
Tens of thousands of pensioners should see a boost to their payments in the New Year, but not everyone will be better off, writes Louise McBride
About 67,000 pensioners should now know - or will soon learn - if they will get a boost to their State pension next year. The Department of Social Protection started to send letters to 67,000 pensioners in late October to advise them if they will be better off getting their State pension under a new system - rather than the one currently in place. Many of these pensioners will see their State pension increase by between €20 and €40 a week - or up to €2,000 a year - if they move to the new system. Many will also be entitled to a back payment.
The new State pension system, known as the Total Contribution Approach (TCA), is expected to be rolled out in full in 2020. However, the 67,000 pensioners being written to will have the option to move to the new system early next year.
Not everyone will be better off under the TCA than the current State pension system (which is known as the 'averaging' system).
The 67,000 pensioners being written to can, however, choose between getting a pension under the current system or under the TCA - and opt for the one which gives them the better pension. The Department of Social Protection has examined the social insurance records of the pensioners concerned to establish which system they'll be better off under.
"No one will be worse off as a result of this review," said a spokesman for the Department of Social Protection. "If a pensioner does not qualify for an increased rate [of State pension] under the TCA, they will continue to receive their existing rate of [State pension] entitlement."
Who can move to the new pension in 2019?
It is only those who hit the State retirement age of 66 on - or after - September 1, 2012 who will get the option to move to the TCA next year. This is because many of these people saw their contributory State pension cut by as much as €35 a week as a result of changes introduced to the State pension in September 2012. Anyone who became eligible for a contributory State pension before September 2012 wasn't impacted by those changes.
Who will get backpayments?
Any of the 67,000 pensioners concerned who are entitled to a higher pension under the TCA should also qualify for a back payment - assuming they move to the TCA. Any back payment due will be paid in one lump sum. You won't get a back payment if you are no better off under the TCA than you are under the current State pension system.
How will other pensioners be affected?
The TCA is expected to be rolled out in full in 2020 and once this happens, it will no longer be possible to choose between the two State pension systems. So those who reach State retirement age when, or after, the TCA system is fully in place will only be able to get their State pension under the TCA - regardless of whether or not they're better off under the TCA or the existing State pension system.
Pensioners who retired on the State pension prior to September 1, 2012 won't be affected by the roll out of the TCA - as they will continue to get their pension under the current 'averaging' State pension system and so their weekly State pension payments won't be affected.
Who will be better off under the TCA?
Parents who took time out of the workforce to rear children could be better off under the TCA - particularly if they looked after children prior to April 1994.
The Homemaker's scheme is the one currently in place to give parents credit (for the purpose of qualifying for the State pension) for time spent outside the workforce to rear children. The main drawback of that scheme is that it does not cover any years spent looking after children before April 6, 1994. This has led to many parents losing out on the full State pension.
The Government is seeking to address this problem by introducing the HomeCaring credit in conjunction with the TCA. The HomeCaring credit has no cut-off date so anyone who took time out of the workforce to look after children can get credit (up to a maximum of 20 years) for that time for the purposes of the State pension - even if they looked after children prior to April 1994.
Furthermore, "people who have gaps in their social insurance record and who suffer under the current averaging system may do better under the TCA," said Paul Kenny, the former Pensions Ombudsman and a course leader with the Retirement Planning Council of Ireland. Such people could include those who started work when very young and who then took time out of the workforce to study or travel.
Who will be worse off?
Many people could get a much lower State pension under the TCA than under the current 'averaging' system. For example, some individuals who would have qualified for a weekly pension of €238.30 under the current system could be entitled to a weekly pension of only €95.30 under the TCA .
Those who have worked abroad for most of their lives, and who then return to Ireland, could be worse off under the TCA - particularly if they worked in a country where social insurance contributions cannot be carried over to Ireland. Some self-employed people could also lose out.
Will there be more changes by 2020?
The shape of the TCA pension set to be rolled out in 2020 has not yet been fully decided on.
The TCA pension currently available to 67,000 pensioners is an interim system. Under that interim system, 40 years of social insurance contributions are required to qualify for the full State pension.
This is much higher than the number of years' social insurance contributions required to qualify for the full State pension under the current 'averaging' system. There is concern that this 40-year rule will also apply to the final TCA - though no decision has yet been made on this.
Under the interim TCA, parents can avail of the HomeCaring credit to get up to 20 years of social insurance credits. As the design for the TCA due to come into force in 2020 has not yet been finalised, there is no guarantee that the HomeCaring credit would work the same way under the TCA of 2020.
If you're due to retire in 2020, or later, find out how you may stand under the new TCA system - as you should be able to take some action now which could offset the impact of any cut to the State pension.
"If you are due to retire in a few years' time and are worried that you'll be entitled to a lower State pension under the TCA than you would be if you were retiring today, it's worth asking your financial adviser what your pension will be when you retire," said Peter Kavanagh, head of communications and public affairs with Active Retirement Ireland.
"If you find that you will get a smaller pension under the TCA than you'd get if you retired today, talk to your employer and see if you can continue to work into retirement - if you are fit and able to do so. Know what your rights and entitlements will be in retirement."
There are many unanswered questions about the final TCA set to be rolled out in 2020 and this is bound to be of concern to those due to retire in, or after, that year.
However, doing what you can now to prepare for any possible cut to the State pension would be wise and should ease any blow this pension revamp could do to your pocket.
WILL THE BACK PAYMENT BE TAXED?
Pensioners who get a back payment of the State pension early next year shouldn’t get hit for tax if the back payment pushes the total amount of income they received in 2019 above the income tax exemption limits for those aged 65 and over. This is because of a change brought in under the Finance Act 2017 which means that since January 2018, certain income (including social welfare ) is taxable in the year that it is earned, rather than in the year it is received.
This measure was brought in “to ensure that payment of arrears of social welfare payments does not result in unintended tax consequences,” said a spokesman for the Revenue Commissioners.
“Where arrears of such payments arise, the accumulation of arrears could, if moved to a receipts basis [where income is taxable in the year the income is paid], result in payments which would normally be taxed at the lower rate of tax coming into charge at the marginal [higher] rate. That scenario has been avoided by leaving social welfare payments on an earnings basis [where income is taxable in the year it was earned].”
Under the income tax exemption limits, a single person aged 65 or more is exempt from income tax where their annual income is no more than €18,000; or €36,000 in the case of a couple. The State pension is not liable to the Universal Social Charge (USC).
There is no need to inform the Revenue Commissioners of any back payment of the State pension received in early 2019. The Department of Social Protection will notify Revenue of the back payments paid to pensioners — as part of its normal payment information exchange process. “Payments referring to 2018 will be allocated to the 2018 tax year on the recipients’ Revenue records,” said a spokeswoman for Revenue. “This, in turn, will ensure that the earnings basis is applied to these payments.”
WHEN WILL BACK PAYMENT BE PAID?
Those entitled to a back payment are expected to get their back money in the first three months of 2019. “Payments will take a number of months to process due to the numbers of customers involved,” said a spokeswoman for the Department of Social Protection.
WHY ARE BACK PAYMENTS DUE?
Back payments are due because the Government has decided that the date at which the new TCA will come into effect for these 67,000 pensioners is March 30, 2018. As it will be early 2019 before these people get any higher State pension due to them under the TCA (assuming they move to the TCA), the higher payments will be backdated to the end of March 2018 — or later where a person reached their 66th birthday after that date. The back payments won’t go back as far as September 2012 — which is when many of the 67,000 pensioners saw their State pension cut.
HOW MUCH WILL BACK PAYMENTS BE?
Where back payments are due, they “will vary significantly, depending upon the individual’s social insurance record”, according to the Department. By this paper’s calculations, were a pensioner due a €40 weekly increase to their State pension, their back payment could be worth about €1,500 — based on the pensioner being entitled to €40 extra a week between March 30, 2018 and the end of 2018.
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