If giving people the option of deferring the drawdown of their State pension until the age of 70 wasn’t enough of a change, this January also sees a move to increase taxation on those aged 66 and over who opt to stay in the workforce.
It marks a significant change in tax policy and will mean that those over the age of 66 may have to pay PRSI on their income, if they opt to defer that State pension. But how much will it cost people?
And does it negate any attraction to the notion of deferring your State pension to stay in the workforce if you just end up paying more tax?
Until January 1st, those aged 66 and over were exempt from PRSI. Now, however, the age exemption has increased to either 70 or until you draw down the State pension.
“This will apply to the employee, the employer and the self-employed PRSI liability,” according to government guidance.
[ Who should pay the bills if the State pension age stays at 66?Opens in new window ]
In short, this means you will continue to pay PRSI at 4 per cent on your income – a charge you could have previously avoided – while your employer will be stuck with a 11.05 per cent charge, again something it previously would not have had to pay.
Those who are already drawing down the State pension, and those who reached the age of 66 by 2024, are excluded from the changes.
So, it’s essentially a consideration for everyone born on or after January 1st, 1958.
The change means, for example, that someone earning €60,000 a year, who would previously have avoided annual PRSI payments of €2,400 a year once they turned 66, will now be levied with a charge of €200 every month.
Similarly, someone due to turn 66 this year who continues to work, with a salary of €100,000, will pay €4,000 a year in PRSI from now on.
And not only that, but that PRSI rate is also due to increase from 4 per cent to 4.1 per cent in October as part of efforts to meet future pension costs following a decision to keep the State pension age at 66.
Will I pay PRSI on my pension?
The good news is that once you draw down your State pension, at whatever age, PRSI will no longer apply to any other earnings, such as income from employment or from a private pension.
“Once the State pension (contributory) is in payment, the person’s earnings are not subject to PRSI,” says Revenue.
If you defer the State pension however, and draw down an approved retirement fund (ARF) under an occupational pension scheme, PRSI will apply under the new rules, says Munro O’Dwyer, a tax partner with PwC.
The imposition of PRSI on earnings after the age of 66 is just one more factor you will need to take into account in any decision to defer the pension. As O’Dwyer notes, it acts as a disincentive to deferring the State pension.
“That probably just needs to be figured out a little bit,” he says.
Tax adviser Terry Quigley, of Gorman Quigley Penrose, notes that if you do defer drawing down your State pension for the full four years, you will end up paying PRSI for four more years than you would normally. And in addition, your employer will also have to pay employers’ PRSI at a rate of about 11 per cent on your salary.
As such, “it’s hard to see how the figures could justify delaying the pension drawdown”, he says.
“It might be attractive to think, I’m quite happy to work for another four years and get a bigger pension – but you are paying for that pension,” says Quigley. He notes that it’s the Government’s “first shot at it”, and while there likely won’t be huge take-up of the new move, it may in time be further incentivised.
[ PRSI loophole could see employers paying staff more to take State pensionOpens in new window ]
Who should defer?
O’Dwyer agrees that he expects take-up will be low, at least initially. He says there are just two situations where it can make sense to defer. The first is where someone may need additional PRSI credits to either increase the level of State pension they qualify for, to or qualify for one at all.
The second is where it might come down to affordability issues, and “you simply wouldn’t be able to survive financially on the €277 per week”.
For “practically everyone else”, it makes sense to draw their pension down at 66.
“Other than those two circumstances, we’re not seeing any financial logic in deferring the State pension,” he says, although he acknowledges that offering people more choice, when it comes to their State pension, is a good thing.
Quigley has taken a look at the sums behind the decision and says that, when PRSI is factored in, it makes deferring the State pension even less attractive.
As he notes, if you opt to take your State pension at age 66, your State pension earnings over the subsequent four years will be €57,680 (four times €14,420 at today’s rates). But what about if you stay working to age 70?
Well, first of all, if your earnings are €30,000, you will face a cost over these four years of €4,920 in PRSI payments, rising to €16,400 if you earn €100,000 – previously this was a cost you wouldn’t have borne.
So the “cost” of staying in the workforce, (taking into account State pension forgone plus PRSI payments) comes to some €62,600 for someone earning €30,000, rising to €74,080 for someone with a gross salary of €100,000.
But aren’t you incentivised to stay working with the new increased payment? Well, at an additional €3,115 a year, yes, you are.
According to calculations by Quigley, however, it will take a person on the €30,000 salary some 20.1 years to make up the difference in the payments they have given up to keep working – and 23.8 years for a person on €100,000. In other words, if you retire at 70, you will get a higher pension – but you’ll have to live until you’re over 90 years of age to make it worthwhile. And if you’re a higher earner, you’ll have to wait until you’re almost 94. Both are well ahead of current life expectancy.
And of course, this doesn’t take into account the fact that employers will have to continue to pay employers’ PRSI on your earnings, at a rate of 11.15 per cent. As Quigley notes, this is an additional cost of €13,380 over four years for someone earning 30,000 a year, and €44,600 on someone earning €100,000 – a cost they wouldn’t have borne before January of this year. So might this make them less keen to keep on older workers?
“If your employee doesn’t draw the State pension, it will add materially to the cost of employing someone past the age of 66,″ says O’Dwyer.
Will I have to pay PRSI?
Examples
Ann is 68 (born August 9th, 1955), employed in retail and earning €100 per week. She does not qualify for a State pension.
Old position: She wasn’t subject to PRSI as she is over 66 years. PRSI Class J applied.
New position: As she is over 66 years on January 1st, 2024, she won’t be subject to PRSI on her earnings. PRSI Class J continues to apply. No change.
Pat is 65 (date of birth August 9th, 1958), employed in retail and earning €100 per week. He intends to draw down his State pension when he turns 66.
Old position: He is subject to PRSI as he is under 66, but would become exempt when he turns 66 in August 2024. PRSI Class A applied.
New position: Once he draws down his State pension when he turns 66, his earnings will be exempt from PRSI, and Class J will apply from age 66.
Sean is 65 (date of birth August 9th, 1958) employed in retail and earning €100 per week. He has decided to not take his State pension at 66 and instead will defer it to a later date.
Old position: Once he turns 66, he would become exempt from PRSI.
New position: His earnings will continue to be subject to PRSI, as he was born after January 1st, 1958, is under 70 years, and is deferring his receipt of his contributory pension. PRSI Class A will continue to apply.
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