BY JOHN ELLIS, FINANCIAL ADVISOR
Recently we looked at the landmark announcement from the Government revealing a series of significant changes to the State Pension (Contributory). It promised flexibility and improved benefits for those aged 66 and above. We saw that the most striking development was the decision to maintain the State Pension age at 66, contrary to recommendations from the Pensions Commission.
Another change was the introduction of a flexible retirement system starting in January where individuals can choose to continue working until age 70 in exchange for a higher pension. This move aims to allow workers to make decisions in line with their personal circumstances and financial goals.
So, let’s look at the options available and see if there is value in leaving it longer to avail of the pension.
Believe it or not this pension is very valuable. If you had to accumulate a fund to buy this pension today as a private individual, you would need a pot of €348,780 to invest. You would then need a return on that money of more than 4% to equate to the pension of €14,469.51 a year.
With the State Pension there is no inflation protection built in but there has been a 20% increase in the last 10 years which equates to a 2% increase a year. The pension in 2014 was €230.30 a week and today it is €277.30.
There is an option on the table now to defer the pension to a later date with a maximum deferral date at age 70. Let’s looks at the figures if you were to defer your pension each year up to the maximum age allowable age of 70.
You are retiring today and taking your pension at age 66 Your pension will be, assuming no changes, €14,469.51 a year. Leave it till next year and retire at 67 you will receive an extra €678.34 a year – your pension will be €15,147.85. Leave it till 68 you will receive an extra €1,434.95 annually – your pension will be €15,904.46 Leave till 69 your pension will be €16,713.25 and, finally, leaving it till 70 your pension will be €17,595.10 a year.
So, lets look at two of the options age 67 and 70. You wait until age 67. You lose out on one year of pension – €14,469.51 – but every other year you get an extra €678.34. But it will take 21.33 years to catch up – (€14,469.51/€678.34 = 21.33) meaning you will need to live to 88.33 years and beyond to see a benefit.
You wait till age 70 to receive your pension, you lose out on €57,878.04 (€14,695.52 x 4) but you will get an extra €3,125.58 every year. But it will still take 18.5 years to catch up and you will need to live to age 88.5 and beyond to see any benefit. You will really need to review your finances and maybe the gene pool you come from.
These reforms do represent significant steps forward for Irish pensioners with the Government committed to a more flexible system. If you are nearing the date of retirement you will need to act. The application process for the State Pension (Contributory) has been streamlined, allowing you to apply three months before turning 66 but, if you have contributions in other countries, you would be advised to start the application process six months before reaching the qualifying age.
Now is the time to get your pension in order. Use all available information and services to stay informed to plan for a secure and fulfilling retirement. Start with the Government website – www.gov.ie.
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