Q&A: So, how exactly will the Government’s new deferred pension option work?

By adam will On Sep 20, 2022 22 0

THE Government is introducing a new pension scheme to incentivise people to work beyond the current retirement age of 66.

he move is aimed at ending the political stalemate over increasing the pension age to 67. But what exactly does it mean?

A: The pension age is staying at 66. Social Protection Minister Heather Humphreys is also introducing a “flexible” pension age to give people a choice to stay working.

People who defer taking their state pension at age 66 would get around €15 a week added to the weekly amount of pension they receive when they do decide to draw it down.

Crucially, for those who want to retire at 66 the standard pension payment, which is €253 a week ahead of the Budget, would apply.

Q: How would this work?

A: People who work until they are 70 will receive a weekly state pension of €315 under a radical overhaul of the pension system.

The Government plans five new rates of pension payments based on when a person retires from the workforce, which will see rates rise incrementally by 5pc for every year a person remains in work.

The new system will mean someone who retires at 67 will take home a weekly state pension of €266, while those stopping work at 68 will receive €281.

If you remain in work until you are 69 then you will be entitled to €297. The highest rate of €315 will be paid to those who retire at age 70.

Q: What is the retirement age now?

A: It is 66 and staying at that, the Government has said. This is the age you qualify for the state pension.

The Government is to introduce a ban on mandatory retirement ages in workplaces to ensure people can take advantage of the new flexible pension system.

Q: Is this in line with recommendations made to the Government?

A: The Pensions Commission report published last October said that the state pension age should rise by three months each year from 2028 until it hits 67 in 2031.

The report also recommended that it should then gradually increase to 68 by 2039. So, the Government is not going with this recommendation.

Q: How will this be paid for?

How the new scheme will be paid for is anything but clear

A: That is anything but clear. There is set to be an increase in the Pay Related Social Insurance (PRSI) rates paid by all to fund this. But the increase will not be set until the completion of an actuarial review of the Social Insurance Fund, where our PRSI payments go.

The higher PRSI is likely to apply from 2024.

Already, the Government-appointed Taxation and Welfare Commission and the Pensions Commission have both recommended that PRSI paid by the self-employed rises from the current rate of 4pc.

Q: Why do we need to pay more PRSI?

A: Keeping the pension age at 66 has huge financial implications for the State’s finances. Controversially, the State’s budget watchdog claimed younger workers face paying an extra €2,500 a year in taxes so that older people can retire at 66.

The Irish Fiscal Advisory Council said last month that people now in their 20s, 30s and 40s will foot the bill for Ireland’s growing number of retirees, which is estimated to rise by 50pc by 2040.

Q: But didn’t we have a fund for precisely this problem?

A: Ah yes, remember the National Pensions Reserve Fund set up at the height of the Celtic Tiger with the aim of paying for an ageing population? That fund could have amounted to €70bn to pay for social welfare and public sector pensions by 2025 if it had not been raided to bail out the banks.

Q: What is the problem?

A: We Irish are young when compared with our European neighbours, but the situation is changing fast. There are now roughly 4.5 people of working age for every pensioner. This is expected to fall to 3.5 to one by 2031, and 2.3 to one by 2051.

This means there are problems on the way when it comes to paying for so many on the state pension and their healthcare needs.

What this means is we either pay more PRSI to fund the rising number of pensioners, or retire later, or a combination of both.

Q: The state pension age is an emotive topic, is it not?

Close

Pensions Commission chairperson Josephine Feehily

A: You bet. The issue of when people get to qualify for the state pension exploded during the last election. At that point, the state pension age had already increased to 66 and was due to rise to 67 last year and 68 in 2028.

To get themselves off the hook, the then new Government put the retirement age on hold and ministers decided to kick the whole issue to a Pensions Commission, chaired by former Revenue Commissioner Josephine Feehily.

Q: Will many people take up the option of retiring later?

A: The cost-of-living crisis is forcing people to delay their retirement. A survey conducted by Behaviour & Attitudes on behalf of Pensions Awareness Week 2022 shows that more than two in five people in Ireland without a pension have either delayed starting one or delayed their planned retirement date due to the cost-of-living crisis.

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Deferred government‘s Option pension work