Is it worth my while paying voluntary PRSI contributions?

Q&A: Dominic Coyle answers your personal finance questions

 

I have stopped working at 55 and I signed up to pay voluntary PRSI payments to protect my state pension rights. I don’t intend to work again but I have paid PRSI continuously for the last 35 years.

I am wondering if I will get any benefit from paying voluntary contributions for the next 10 years or more or will my past contributions be enough to qualify for the maximum state contributory pension.

Mr P.C., email

For those that can afford them, voluntary PRSI contributions are a good way of ensuring you maximise your potential State pension, even if you are not currently working in a job where they are deducted on a regular basis.

But it is important to be aware that voluntary contributions will not give you access to all the benefits PRSI normally confers.

There are currently a few different rates payable and which one applies will depend on what you were paying in your previous employment.

For most of us in the private sector, who have been paying class A PRSI contributions through our working life, the voluntary rate at which we will be paying is 6.6 per cent of your reckonable income from the previous tax year. The least you can pay in order for the contributions to count towards benefits is €500 for the year.

But, as I said above, the voluntary payments won’t grant you any rights to many of the welfare benefits you could have enjoyed while paying PRSI during your working life. That includes things like: jobseeker’s benefit, maternity/paternity benefit, occupational injuries, illness and health and safety benefits; the invalidity pension; carer’s benefit, adoptive benefit and access to dental, optical and hearing treatment.

What it does count towards are the contributory State pension, the contributory widow(er)’s pensions and the contributory guardian’s payment.

Class A also includes public servants hired since April 5th, 1995.

Permanent, pensionable public servants hired before that date pay any voluntary contributions at a lower 2.6 per cent rate – with an annual minimum of €250 – but, in common with that generation of public servants, there is no entitlement to the State pension.

Given that the real benefit of voluntary contributions is ensuring you do not lose out on a full State pension, your question on continuing payments is perfectly valid.

Until recently, how much you received by way of State pension depended on the average of your social insurance (PRSI) contributions across your working life. The working life was defined as the period from when you start work until you reach the State retirement age.

While traditionally 65, that rose in 2014 to 66 and was due to rise again this year to 67 and to 68 in 2028. Those additional increases are currently frozen pending an ongoing review of pensions after the issue provoked a storm on the doorsteps at the last general election. That review has already missed its deadline for reporting back.

Average

So, in a case like yours where you have worked for 35 years and have another 10-13 years to go before you reach retirement age, you would need to have an average of 48 contributions per annum for that full period.

On that basis, you will need to make your voluntary contributions for the next 10, or even 13 years, depending.

However, under new rules, the State is switching to what it calls a Total Contributions Approach. It will require only that you pay 40 years of PRSI contributions (2,080 weekly contributions). On this basis, you need only pay social insurance for the next five years, given that you already have 35 years of contributions banked.

That would save you between five and eight years of payments which is significant.

Although, as with everything pension-related, the necessary legislative reform to put this new approach fully in place has been delayed, anyone who retires after September 1st, 2012 – like you – is currently assessed on which of the two approaches benefits them more.

In your case, it is clearly the second route so you should countenance paying PRSI only for the next five years, regardless of when you will start to receive the State pension.

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