Starting January 2024, significant changes will be introduced to the rules surrounding PRSI (Pay-Related Social Insurance) liability and qualifications for the State Pension Contributory in Ireland. These changes are designed to provide greater flexibility and inclusivity for future pensioners and align with evolving socio-economic conditions.

In Deferred Claiming of the State Pension, The Pros and Cons, Brendan Casey took a detailed look into these new regulations and their implications.

Tax

Deferred Claiming of the State Pension, The Pros and Cons (Jul 24)

2 hrs

Video

Brendan Casey

Lecturer

Key Updates to the State Pension Contributory Rules

Eligibility for Deferral

One of the most notable changes is the introduction of the option to defer the State Pension Contributory. Individuals born in 1958 or later can now defer their pension claims until the age of 70. Before this change, pension claims were more rigidly fixed around the retirement age.

The deferral is not limited to full-year increments; you can opt for shorter periods such as weeks or months. For instance, if a person reaching the age of 66 hasn't accumulated the necessary 520 weeks of paid contributions, they can defer their pension for the time needed to meet this criterion, even if it’s just a few months.

Contributions Requirement

The new regulations maintain the requirement of 520 weeks (equivalent to 10 years) of paid contributions to qualify for the State Pension Contributory. However, they have abolished the rule requiring people to start paying contributions before their 56th birthday. This change offers greater flexibility for individuals who may have started their careers later in life. Nevertheless, you must start contributing before the age of 60 to amass the necessary 520 weeks.

Employment Status and PRSI Class

Initially, individuals were liable to pay PRSI until the age of 66, at which point any additional contributions were unnecessary once they claimed their pension benefits. Under the new system, if a person chooses to defer their pension, they must continue paying PRSI contributions until their chosen claim date. Upon reaching the age of 70, PRSI contributions cease entirely, even if pension claims are further deferred.

It's crucial to note that while awaiting the deferred pension claim, the employer must continue deducting PRSI from the employee's wages. Once the person’s pension kicks in, the PRSI class will be updated accordingly. For instance, contributions under Class A revert to Class J upon retirement, a classification reserved for pensioners.

Implications of Deferring the State Pension Contributory

Deferring your pension claim may have both benefits and drawbacks, often depending on individual circumstances. Here are some factors to consider:

Benefits

1. Additional Contributions: The period of deferral allows for continued PRSI contributions, potentially meeting the minimum requirement if it hasn’t already been achieved.
2. Potential Higher Pension: Each extra year of contributions can increase your pension amount, thereby providing better long-term financial security.
3. Tax Considerations: Some individuals may find tax advantages in deferring their pension due to reduced income tax liabilities once they cease working and become pensioners.

Drawbacks

1. Reduced Immediate Income: Delaying the pension means missing out on immediate financial benefits, which could be significant depending on one's current economic situation.
2. Complexity in Forecasting: The Department of Social Welfare doesn’t provide forecasts for the benefits of deferred claims. Individuals will have to base their decisions on their own assessments or advice from financial advisors.
3. PRSI Contributions During Deferral: Continued PRSI payments are necessary until the pension is claimed, representing an additional financial outlay that some may find burdensome.

Practical Steps and Considerations

Here are some practical steps to take if you’re considering deferring your State Pension Contributory:

1. Consult Financial Advisors: Professional guidance from accountants or financial advisors specialising in pension plans can be invaluable. They can help forecast the benefits and drawbacks specific to your situation.
2. Complete the Correct Application: Accurately fill out the new application forms, specifying the date you plan to claim your pension. Be mindful that social welfare offices will not offer personalised advice on whether to defer your pension.
3. Monitor PRSI Contributions: Ensure all necessary contributions are made to meet the 520 weeks threshold. If you experience employment gaps, note that credits from unemployment periods will not count towards this requirement.
4. Understand Refunds: Be aware that PRSI contributions made after attaining the qualifying number of weeks can be refunded if they were paid past the chosen claim date.

The upcoming changes to PRSI liability and qualifications for the State Pension Contributory offer improved flexibility but come with additional complexities. The deferral option until the age of 70 allows individuals to make updated contribution plans and potentially increase their pension amount. However, the lack of guidance from welfare offices necessitates a thorough personal or professional evaluation to make the best decision.

Ultimately, the new rules aim to cater to a broader demographic and acknowledge changing careers and lifecycles, ensuring that more people can secure a feasible retirement plan. As these regulations come into effect, it’s advisable to stay informed and seek expert advice tailored to your specific financial situation.

For the full session, please see here. In this course Brendan Casey covers the following topics:

• The loss of years of pension payments for the years between age 66 and 69, including the payment for a Qualified Adult, may not justify or offset the potential increase in entitlement.
• A deferred payment may substantially increase the eventual title and be a worthwhile investment.
• Continued payments of Voluntary Contributions while pension is deferred may be greatly beneficial.
• Continued PRSI payments after age 66 for both the employee, self-employed person and the employer may have no effect on the deferred entitlement.
• Clients with less that the minimum 520 weeks of PRSI paid at age 66 have an opportunity to qualify for a pension.
• Classes B, C or D public or civil servants have an opportunity to qualify for a partial State Pension Contributory
• Clients in receipt of a Survivors Contributory Pension will increase their title to a State Pension by additional PRSI payments.
• Self-Employed clients born before 1963 will be excluded from the incentive if they defer claiming the State Pension at age 66.

Tax

Deferred Claiming of the State Pension, The Pros and Cons (Jul 24)

2 hrs

Video

Brendan Casey

Lecturer

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.