Returning emigrants may struggle to get full State pension under new rules

Irish people living abroad who return to work here may find it considerably difficult to claim a full State pension once they retire, under new rules proposed by the Government.

However, returning emigrants who worked in the European Union or another country with a bilateral agreement with Ireland, may be able to plug the shortfall by availing of a bilateral social security agreement.

Under the proposed total contributions approach (TCA), which will replace the current “averaging” approach to calculating how much of a State pension a person is entitled to from 2020, a person may need 40 years of contributions to be entitled to the full State pension.

This means if you spend just five years outside Ireland you may not qualify, unless you return to work here for 40 years. Currently, the average approach means that a person may be able to work for just 10 years and claim the full weekly amount in retirement.

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The move to a total contributions approach comes amid a significant demographic shift which will see the cost of funding the State pension soar

The example is given in a consultation paper launched by the Government on Monday, of a person who worked in the UK between the ages of 17 and 52, before returning home to work for a further 13 years. Under the current approach, this person would be entitled to 100 per cent of the State pension, but moving to total contributions would see their entitlement shrink to just 33 per cent.

It may, however, be possible for this person to boost their State pension by drawing on contributions from the country in which they worked; as well as EU/EEA countries, Ireland has a bilateral agreement with countries including the US, the UK, New Zealand, Australia and Canada.

More equitable

The consultation paper, seeking views on the proposed move to the TCA, was launched by Minister for Employment Affairs and Social Protection Regina Doherty, who said the move to TCA is to provide for a more equitable and fair approach to pension provision.

The move to a total contributions approach comes amid a significant demographic shift which will see the cost of funding the State pension soar. By 2055 for example, the pension shortfall is forecast to be 3 per cent of GDP.

The consultation paper rules out allowing people to choose the most beneficial approach – either the current averaging approach or TCA – to their State pension entitlement

Also on Monday, the Minister reiterated that the loophole which saw some 36,000 workers – mainly women – receive reduced pensions, is to be resolved with an early move to the total contributions approach for this cohort in the first quarter of next year. However, resolving one anomaly may result in opening another; the report alludes to this when it notes that some pensioners retiring in 2028, who currently qualify for a full pension, may not under the new approach.

“The 2020 proposal will have to consider this group carefully in the final design of the scheme,” it says, noting that “transitional measures may be considered in the final scheme”.

Consultation process

The consultation paper also rules out allowing people to choose the most beneficial approach – either the current averaging approach or TCA – to their State pension entitlement.

“Allowing any group to choose the most beneficial approach to them has significant overall costs which reduce available funds to other pensioners,” the report says, adding that this would undermine the sustainability of the State pension.

The report also identifies other cohorts who will lose out under the new proposals. These include a mother who enters the workforce at the age of 40 and retires aged 52; currently she would be entitled to a 100 per cent pension having fulfilled the 10-year rule. Under the TCA approach however, her pension would shrink to 63 per cent of the full rate. Another example is someone who was self-employed from 1975 until State pension age in 2016; their entitlement will shrink from 100 per cent to 90 per cent.

Winners include the aformentioned cohort of women who fell foul of the averaging rule.

The consultation process will run until September 3rd, 2018.