Monday 16 July 2018

Your guide to ensuring you don't lose out in State pension revamp

Some pensioners will be almost €2,000 a year better off under this year's changes to the system, but others will lose out

Social insurance contributions paid while working in the US, Australia, Britain, France, Spain, and Germany can count towards your Irish State pension
Social insurance contributions paid while working in the US, Australia, Britain, France, Spain, and Germany can count towards your Irish State pension
Louise McBride

Louise McBride

Tens of thousands of people who had their State pension cut in recent years are set to get that cut reversed under a pensions overhaul announced by Social Protection Minister Regina Doherty last month. However, not everyone will end up with a better pension under the changes.

What has been overhauled?

Doherty has introduced a new approach for those whose State pensions were cut as a result of changes introduced in 2012. Under the new system, which is known as the Total Contribution Approach (TCA), the total amount of social insurance contributions paid by, or credited to, an individual - rather than the timing of them - will determine the rate of State pension they're entitled to. A new HomeCaring credit will also be introduced which will give more parents credit for time taken out of the workforce to rear children - and so improve their chances of qualifying for the full State pension.

The aim of the TCA is to have the contributory State pension (the pension linked to one's social insurance contributions) paid out in a fairer way than it is under the current 'averaging' system. "The averaging system used since 1961 could result in the anomaly where two people with the same number of social insurance contributions get paid different rates of pension," said a spokeswoman for the Department of Social Protection. "Under the TCA, this anomaly will not arise."

How will the credit work?

The HomeCaring credit will be similar to the Homemaker's Scheme which is already in place - but with one big difference.

The main drawback of the Homemaker's Scheme is that it does not cover any years spent looking after children before April 6, 1994. The HomeCaring credit has no such 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.

When do the changes kick in?

The new TCA and HomeCaring credit will come into effect on March 30, 2018. However, pensioners must wait until early 2019 before getting their pension restored to the higher rate. Any back payments owed from March 30, 2018 will be paid to pensioners in early 2019.

People who got a reduced pension because of the changes introduced in September 2012 will have the option to continue to receive their State pension under the current averaging system - or under the TCA. So too will anyone who applies for a State pension for the first time between now and 2020.

Will anyone lose out?

The 15,680 men who had their State pension cut as a result of the September 2012 changes may not get their pension restored under the anomaly 'fix' - as many will not qualify for the HomeCaring credit. It's possible however that some of these people may be able to get their pension restored if they can successfully argue their case to the Department - though this will depend on the reason for the gap in their social insurance record.

There are many reasons, apart from looking after children, that people take time out of the workforce - and end up with a gap in their social insurance record, which in turn eats into the value of the State pension.

"If you were working here and became unemployed and didn't sign on, you could have built up a gap," said Paul Kenny, the former Pensions Ombudsman who is a director with Trustee Decisions and a course leader with the Retirement Planning Council. "If you were ill and didn't claim illness benefit, you'd have missed credits. If you were working abroad, you may have built up a gap in your social insurance record, particularly if you worked in a country, like Saudi Arabia, where social insurance contributions paid cannot be carried over to Ireland."

People may also have built up gaps in their social insurance record if, at some stage, it was not compulsory for them to pay PRSI contributions.

There are people who have a gap in their social insurance record through no fault of their own. Employers have a duty to pay social insurance contributions on behalf of their employees - but this hasn't always happened.

"There are cases where people were paid under the counter - or where employers didn't pass on stamps [an old term for social insurance contributions] or PRSI," said Kenny. "This could be an issue for some people, particularly those in the construction trade, as it would have led to a gap in their social insurance record. Some people have got fraudulent payslips showing PRSI was paid, when it hadn't been. The employee often had no way of knowing the payslip was fraudulent."

Some people may not be any better off under the new TCA approach because they have very few paid social insurance contributions and a lot of credited contributions.

For the moment, people can choose between getting a pension under the averaging system or the TCA - and opt for the one which gives them the better pension. However, in 2020, the TCA approach is expected to be implemented in full for those applying for the State pension for the first time and so from that date, it will no longer be possible to choose between the two. Some people would lose out as a result because the pension paid out under the TCA approach could be up to 60pc less than that paid out under the current averaging system.

How can I ensure I don't lose out?

Get your social insurance record and check that it tallies with your experience.

"We've had situations where people haven't got contributions or credits for the time they worked," said Kenny. Should you find that there is no record of social insurance contributions for a period of time that you were in the workforce, point this out to the Department of Social Protection and get evidence together so that you can prove that you did in fact work at that point.

Should you have worked abroad for a number of years, be sure to carry over any social insurance contributions paid in that country if you can. These contributions 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, Germany and the United States 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.

Be sure to claim the HomeCaring credit or to apply for the Homemaker's Scheme if you have spent time out of the workforce to rear children.

It can be hard to find work after a long spell out of the workforce, particularly if you are returning to the workforce in your 50s or 60s. So while the homemaker's scheme or HomeCaring credit protects your entitlement to the State pension for the time you were rearing children, any time out of the workforce after you have reared your children could see you build up a gap in your social insurance record - and lose your entitlement to the full State pension. "If you are struggling to find work after rearing your children, be sure to sign on," said Kenny. You should be entitled to claim the Jobseeker's benefit in such instances and when receiving that benefit, you get credited social insurance contributions. These credits will prevent you building up a gap in your social insurance record and protect your entitlement to the State pension.

Should you have had your State pension cut since 2012 and be one of those who doesn't qualify for a higher contributory pension under the TCA, see if you qualify for the means-tested non-contributory State pension. As long as you do not have additional means (such as an occupational pension or rental income), you may be entitled to get higher payments under the means-tested non-contributory State pension, according to the Department.

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HOW DOES ‘AVERAGING’ WORK?

The pensions overhaul is a response to measures introduced in September 2012 which led to 42,278 people getting their contributory State pension cut. It is also linked to the ‘averaging’ system that has applied to the contributory State pension since 1961.

Under the averaging system, one of the things which determines whether or not you qualify for the full State pension is your yearly average of social insurance contributions. This yearly average is calculated by dividing the number of social insurance contributions or credits (also known as credited contributions) you have by the total number of years you have been making social insurance contributions or credits. This total number of years is calculated from the date you first started paying contributions — to your last full year of contributions. The higher your yearly average, the better your chance of getting the full State pension. The lower your yearly average, the smaller the pension you get.

The averaging system meant that many of those who started work at a very young age — and who later went to college or travelled abroad for a number of years before returning to work — were at a disadvantage. So too were many stay-at-home parents if they took time out of the workforce to look after children in the home before April 1994. These years out of the workforce led to a gap in their social insurance record. A long gap reduced the average amount of social insurance contributions paid a year over their lifetime, which in turn slashed the State pension they were entitled to.

This situation was exacerbated in September 2012 when the rules around the State pension were tinkered with.

WHAT WAS CHANGED IN 2012?

Before September 2012, there were four rate bands determining the level of State pension people were entitled to — and each rate band correlated to a yearly average score.

In September 2012, two new rate bands were introduced (bringing the total number of bands to six) and as a result of this, many people saw their pension cut by up to €35.50 a week. One of the intentions behind the 2012 changes was to make the State pension system fairer —especially for those who had paid PRSI for longer. However, many people were hit with an unfair pension cut following the 2012 changes — and this was largely due to the anomaly around how the yearly average was calculated. At particular disadvantage were the women who were forced out of the workforce due to the marriage bar, which was in place until 1973. It is this anomaly which Doherty has sought to fix.

WHAT ARE CREDITED CONTRIBUTIONS?

Credited contributions are similar to the social insurance contributions you pay while working. You may qualify for credits if you become unemployed, sick or retire early — or if you are looking after young children in the home. Credits are usually awarded at the same rate as your last social insurance contribution. These credits count towards — and therefore usually protect your entitlement to a State pension in the future. Credited contributions are not available to a person who makes a choice to take time out of the workforce to go abroad or to study.

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