Insights 25th Jan 2025

Your personal finance questions –
Should I be worried about the changes being made to how the state pension is calculated?

Charlie Weston

Irish Independent
Saturday 25th January 2025

Q: I’m due to get a state pension – but I am worried about changes that I have heard are on the way. Should I be?

A: From January this year, the way in which a new state pension (contributory) entitlement is calculated has changed, said financial planning expert Kieran McAuliffe, who is a director at financial advisory firm Provest.

He said that up until the end of 2024, once a person had met the minimum requirement of 520 paid contributions, the rate of the state pension (contributory) was calculated using two methods: the yearly average (YA) method that has been in place since the introduction of the contributory pension in 1961, and the total contributions approach (TCA) that was introduced in 2018.

The most beneficial payment is then awarded to the individual. To qualify for a full-rate pension under the YA method, a person must have an average of 48 contributions per year since they first entered insurable employment, Mr McAuliffe said.

To qualify for a full-rate pension under the TCA method, a person must have 2,080 contributions – the equivalent of 40 years (52 weeks x 40). These contributions can include up to 20 years’ home caring periods or PRSI credits.

Under the TCA, every contribution will count in calculating your state pension (contributory) entitlement.

From January 2025, there will be a 10-year phased removal of the yearly average (YA) method used to calculate a state pension (contributory) entitlement.

The yearly average method used in calculating state pension entitlements has been criticised for creating anomalies, particularly for women.

From 2034 onwards, entitlements will be based fully on the new total contributions approach, Mr McAuliffe said.

In 2025 an individual claiming the state pension will be awarded the higher of: the pension calculated on the TCA; or a pension based on 10pc of the TCA pension plus 90pc of the yearly average pension.

In 2026, this will change to 20pc of the TCA pension and 80pc of the yearly average pension, and so on, so that by 2035 only the TCA will be used to determine the State pension.

Having compared the outcome of method one and two, the higher rate will be awarded.

TCA resolves many of the anomalies arising from the YA calculation model. The main one is that it is possible for people to start paying social insurance later in their working life and yet qualify for a pension at the maximum rate.

Entitlement to a full pension can in some cases be achieved from as little as 10 years of social insurance contributions.

Another anomaly arises where a person has a gap in their social insurance contribution record, and qualifies for a lower pension entitlement than a person with the same number of social insurance contributions. This occurs as their yearly average is calculated over the person’s entire “working life”.

TCA has been described as fairer and more transparent as it more closely reflects the social insurance contributions made by a person. The 10-year transitional arrangements are to avoid a “cliff-edge” effect, Mr McAuliffe said.

Kieran McAuliffe is the Director of Provest Private Clients Ltd.