Work till you’re 70 to get a higher pension? Not so fast

It’s been billed as “the biggest ever structural reform” to Ireland’s state pension regime but, despite the scope of the changes announced back in September, it may yet take some time before the developments have a practical impact on workers across the State.

So what are the changes? Well, the big decision is that people will still be able to retire and draw down their state pension at the age of 66. This had been due to increase to 67 back in 2021 (and to 68 in 2028), but, amid considerable opposition, the Government rowed back before making this final decision.

For Munro O’Dwyer, a partner with PwC, the Government’s decision on this front is “smart” as it puts the matter to bed and means it is unlikely to become an election issue come 2025.

“For once and for all, this idea of what age the state pension should be at has gone off the table,” he says.

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But just because you can retire at 66 doesn’t mean you have to. Under the “flexible” proposals, which are due to be implemented in January 2024, workers can postpone the age at which they get their state pension. Every year deferred will result in a bigger payment — for example, retiring at 66, based on today’s rates, means an annual pension of €13,156 a year. Postponing this to the age of 70 will see that annual payment rise to €16,380.

Some have criticised the rates of payment, arguing that you’d have to live to at least 86 in order to enjoy the full benefit of deferring your pension, as 20 years of your pension at the standard rate (€263,120) is almost equal to 16 years of the pension at the higher rate (€262,080).

However, the figures stack up for O’Dwyer, who notes that life expectancy is around this anyway.

“The rates are ageing right for what’s it worth,” he says.

Who will pay for it?

The challenges facing continued provision of the state pension at a time of an ageing population have been much discussed in the industry and among government advisers. The Social Insurance Fund from which it is paid is expected to have a deficit of €20 billion by 2071. And on the face of it at least, the latest proposals won’t mitigate the costs.

So, this means that a way of funding the state pension will have to be found. According to the Government, this will be done via increased PRSI payments going forward.

Figures from the budgetary watchdog, the Irish Fiscal Advisory Council (Ifac) suggest that someone earning €35,000 will have to pay about €1,800 in extra taxes a year to pay for the costs of keeping the state pension age at 66. And clearly it is those further away from retirement who are likely to bear the bigger burden.

“Some generation will have to suffer the downside,” says O’Dwyer, adding that the proposals will be to the potential detriment of those who are younger.

Who will it suit?

So who might take advantage of the higher pension age? For O’Dwyer, those who are relatively well paid and have a less physically challenging job, but who may face shortfalls in their own pension planning, may be inclined to put off their state pension until they turn 70 to avail of the higher payments.

On the one hand, this means the higher payments will be beyond the reach of those in more physically challenging jobs, such as retail or construction.

A missed opportunity, argues O’Dwyer, is to allow workers gradually phase out of the workplace. This would see someone work four days a week and claim 20 per cent of the state pension at 66 for example. Over subsequent years, the amount of time spent at work would decrease, while the proportion of the state pension paid out would increase, and at a higher rate.

“This would be intuitive and attractive to lots of people,” says O’Dwyer.

Work till 70? Not so easy

However, while in theory working until you’re 70 may be attractive for some people, as O’Dwyer notes, “I’m not sure how actually practicable it is and how many people will actually use it”.

“Over time what we need to watch is this actually feasible for people to take advantage of,” he says.

The reasons for this are multiple. First of all, there’s the issue of personal taxation. After all the state pension is a taxable benefit. By deferring their pension until the age of 70, a person could see their marginal rate of taxation increase considerably if they are pushed into a higher tax bracket.

“The strongest arguments against taking it are the tax issues if it changes your tax position,” says O’Dwyer.

But for others, tax may be a reason to defer their state pension. Drawing down the state pension at the age of 66 and continuing to work for example — which is also an option — may not be the wisest option for some, as it may push them into a higher tax bracket.

Waiting until they’re 70 — particularly if they don’t have a substantial private pension — may be a better option.

The bigger issue however, is likely to be whether or not it will be even feasible to continue working until you’re 70, given that most employers still operate a normal retirement age of about 65.

“I believe the biggest change will be on the employer’s side and how this operates in firms that do have significant numbers in their 50s and 60s,” says O’Dwyer.

Taoiseach Micheál Martin alluded to this in the summer on his visit to Japan. On the one hand, he said, the “idea of retiring at 66 has to go”. But on the other, he acknowledged the challenges, noting that it will be difficult for people, who have current employment contracts, to continue working until they’re 70.

“We have to work on that more, but I don’t think it can be retrospective. You can’t arbitrarily interfere with contracts that individuals enter into. It has to be worked on and the detail has to be fleshed out.”

Employers’ view

Eleanor Cunningham, a partner with McCann Fitzgerald, says that most employers are currently operating with traditional employment ages of between 60 and 65, adding that the issue of working beyond this, “is a problem that has been brewing for a long time”.

“In our experience, most employers are holding the line with traditional employment ages, but are coming under increasing pressure,” she says, pointing to poor personal pension provision that can put financial pressure on people to keep working.

While some employers have already moved on this — Lidl for example, abolished the mandatory retirement age clause for all current and prospective employees during the summer — others have not.

Where employees do want to work beyond these ages, they will typically have to bring a case based on the Employment Equality Acts. “There has been a huge uptake in discrimination cases on the grounds of age,” Cunningham says — noting that from 2012 to 2016, there was a 370 per cent increase in people taking cases on age discrimination grounds.

Employers can argue against this however, provided that a mandatory retirement age can be “can be objectively and reasonably justified”.

A further complication raised by Cunningham is that if you do decide to keep working after the age of 65, your employer may not be required to continue contributing to your pension (depending on the retirement age of this contract). You may also be unable to get continued death in service benefit.

Also signalled in September is confirmation of a move to the total contributions approach for calculating how much of a pension you are entitled to.

According to PwC’s O’Dwyer, this is likely to result in more people not qualifying for the maximum state pension. If this turns out to be the case, there may be even more pressure for employees to stay in the workforce longer in order to make up their entitlements.

How much of a state pension will I get?

Retirement age Weekly payment (€) Annual (€) Annual difference (€)

66 253 13,156 -

67 266 13,382 226

68 281 14,612 1,230

69 297 15,444 2,062

70 315 16,380 2,998

*Based on current payment rates