Contributory pension - how the last year is counted?

JoChervil

Few days ago I read in the thread, which I can't find now, that the whole first year and the whole last year is taken into account when your pension is calculated.

So how does it work?

For the first year you have your months till you start your work credited?

But most importantly, how the last year is considered? For example, if you are born on the 5th of January, so you have only one stamp for this year before retiring, while the whole year is taken into account, so it can massively influence your yearly average. So how the first year and the last year are treated?

Asking for a person, who will retire in few years, so likely still in the old system.

coylemj

Contributions made in the calendar year when you reach age 66 (the current qualifying age) are disregarded. So the clock stops on December 31 in the year when you reach 65.

You say that your friend is 'in the old system' but you can currently do both calculations (averaging and total contributions) and pick the one that yields the better pension. However the averaging system could be history by the time your friend reaches pension age, they have been saying for years now that the total contributions approach will eventually be the only system.

coylemj

At the moment, the Dept. of Social Protection calculates your state (contributory) pension under the averaging system and the total contributions approach and you get the higher rate.

This has just been announced ...

From January 2025 there will be a 10-year phased removal of the Yearly Average Method, which means that all pensions will be calculated using only the Total Contributions Approach (TCA) by 2034.

During the 10-year transition period, pensions will be calculated using two methods:

the first method will use the full TCA approach

the second method will, starting in 2025, calculate what your pension would be under the existing Yearly Average Method. The pension rate of payment will then combine 90% of this yearly average rate with 10% of the TCA rate. The proportion accounted for by the Yearly Average Rate will then reduce by 10% over each of the subsequent 9 years until the pension calculation is fully based on the TCA method only.

See the last section 'A fairer method to calculate your State Pension (Contributory)' here ...

https://www.gov.ie/en/publication/90d8b-changes-to-the-state-pension-contributory-what-you-need-to-know/

JoChervil

https://www.boards.ie/discussion/comment/121101063#Comment_121101063

Thank you very much. I am still not sure how it will be counted. Average method is better for my friend.

So if he is born on the 5th of January 1960, so how will it be counted 90-10 or 80-20? I mean how this last year will be treated (theses 5 days of last year)?

coylemj

If your friend was born in 1960, he will reach the age of 66 in 2026 at which point the calculation will be 80% of the pension he would receive under the averaging system and 20% of the pension he would receive using TCA.

That table is my creation, it matches the DSP statement that the transition will start in 2025 and that TCA will be the only game in town from 2034.

For calculating his contributions history, the clock will stop on Dec 31st, 2025. Meaning that if he still working into 2026, none of his subsequent contributions (From Jan 1, 2026) will count towards the state pension.

But we are into new territory here because previously, it didn't matter if the pension was calculated on the last day of the year before you reached 66 or on your 66th birthday. With this transition in place, it is going to make a difference to people like your friend as it will affect the final number - will the DSP do the calculation on 31/12/2025 (when your friend's contribution record is locked down) and use 90/10 or will they base it on the rule applying six days later, on 06/01/2026 (your friend's 66th birthday) when the rule will be 80/20? I suspect it will be the rule which applies on the applicant's 66th birthday but we will have to wait for that to be clarified.

onefish

@coylemj

Thanks for that post. As someone who hits 66 in Dec 2025, looks like I'd be in the 90/10 group. So not too much of an adverse effect.

If that 10 year transition is how it actually ends up happening!

coylemj

In case anyone missed it, the TCA option by itself is always on the table so if that gives you a better pension that the averaging system, that's the one that will apply to you. You only need to consider the averaging system if you have or will have 2,080 or fewer reckonable contributions.