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PRSI loophole could see employers paying staff more to take State pension

Ibec warns that legislation on equality and pay transparency may limit scope for employers, many of whom also have mandatory retirement ages

Employers and workers both gain financially if the worker does not defer the State pension and they share the benefit of lower PRSI charges. Photograph: iStock

Dominic Coyle
Tue Jan 30 2024 - 05:00

A quirk in PRSI rules could see employers looking to persuade older staff not to defer taking the State pension but also continuing to work.

Since the start of the year, anyone turning 66 has had the option of deferring taking the State pension for up to four years in return for modestly higher payment over their remaining lifetime from that point.

Typically, the measure is aimed at workers who may not have paid enough social insurance (PRSI) to qualify for a full State pension. But it could also prove attractive for people living longer and in better health.

However, almost all workers who continue in employment will have to pay PRSI at 4 per cent on their earnings. Previously, no one paid PRSI on any income once they turned 66.

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And employers, who until the end of last year paid just 0.5 per cent PRSI for anyone over the age of 66 working for them, now face PRSI costs of up to 11.05 per cent if those workers defer taking the State pension.

That raises the prospect of employers offering to increase the pay of older workers if they actually take the State pension now – splitting the benefit of the lower PRSI charges that would then apply.

A 5 per cent increase in wages could be valuable to a worker who was going to be 4 per cent worse off if they deferred the State pension and had to pay PRSI. It would also see the employer being better off to the tune of 5.55 per cent, as they will have to pay PRSI of just 0.5 per cent on the worker’s wages, not 11.05 per cent, which would be the case where the State pension is deferred.

And, of course, they also have their State pension income.

[ People who work until 70 will get higher pension under change starting in January ]

The figures would be different for lower earners – anyone earning less than €441 a week or €22,932 a year, where the employer’s social insurance rate is 8.8 per cent – but the principle of both parties benefiting if the worker does not defer their pension remains.

Almost all workers are likely to be better off financially under such an arrangement over the remainder of their lives than they would be by deferring the pension.

Employers’ body Ibec confirmed that the lower rates of PRSI would apply to staff and employers, and the worker moves from Class A to Class J PRSI when they draw down the State pension.

However, it noted that there were “a substantial number of other considerations that an employer must keep in mind”.

These would include equality claims on the grounds of age, the lobby group said, adding that employers will have to consider the upcoming EU Directive on Pay Transparency “if paying different rates for the same work or work of equal value”.

“These issues could quickly outweigh any perceived benefit changes in class of PRSI,” Ibec warned. “Employers should take advice prior to considering any such proposals.”

[ Turning 66? New rules on PRSI could cost you money ]

Deferring the State pension is likely to be an option only for workers whose employers either have no contractual retirement age in place or have indicated they are abandoning such measures. Many companies have policies in place forcing retirement at either 65 or 66.

Ibec said it was not aware of any move by employers to abandon contractual retirement ages despite continuing difficulty for companies in some sectors in recruiting staff even as they are forced to let experienced staff leave.

Dominic Coyle

Dominic Coyle

Dominic Coyle is Deputy Business Editor of The Irish Times

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