Jill Kerby: To claim or not to claim? That may be the question in 2021
If you could access your State pension early, would you? Even if it meant you would lose €40 a week? And what if you could instead delay claiming your pension, say even until you were age 70, but could get an extra €50 every week or €298.30 instead of €248.30? Would you do it then?
Last week a life assurance company, Royal London, suggested that exactly this should be among the recommendations of the latest Pension Commission to the government when their report is presented next June.
(Readers may recall that the decision to extend the state retirement age to 67 next year was stoutly challenged on the doorsteps during last February’s election. The coalition government agreed to postpone it and let the Commission take another look.)
Royal London meanwhile thinks a very good way to reduce the huge rising cost of the state pension (and public service pensions) – an extra €370 million a year according to the Fiscal Council – could be reduced by tempting thousands of new pensioners to either extend their retirement to age 70 via a sliding scale of higher payments for each year postponed from age 66 with an extra €50 total income per week (or €2,600 a year) or to accept a €40 reduction in income if you opted to take your state pension at 60. (That is, €2,080 less per annum.)
How it came to this is that Irish industry and the government decided many decades ago that the common retirement age would be 65, though our complicated multi-pension system in both the public and private sectors allowed some workers to retire earlier or later.
Efforts have been made to standardise retirement ages in the public service (where it is now at age 70, with some exceptions) while in the private sector, where there are about 10 different pension iterations, you can still collect a private pension from age 50 or from 60 depending on the kind of pension contract you have (retirement annuity contracts and personal pensions/PRSAs being the most common) and whether you were a company director, self employed or employee. What they all had in common however was that they could only collect their state pension at 65.
So would introducing an earlier/later state pension option also solve this problem?
Well, it just might. In both the United States and Canada, workers who qualify for a US social security pension or a Canadian Pension Plan (CPP) income can opt to retire early - from age 62 or 60 respectively, with a reduced benefit. Those who opt to postpone collecting their pension up to age 70 gain extra income.
The North American systems differ from ours in that their state pension depends on not just the numbers of PRSI-equivalent ‘stamps’ you paid, and over how many years, but also how much you earned.
There is no Irish equivalent of a PRSI based ‘universal’ payment of €248.30 a week for everyone in North America, just minimum and maximum pension payments. In the US, for example, at age 65 you will be entitled to a maximum monthly pension of $3,011 in 2020, but to get that amount you have to have been earning €137,700 a year and have paid all your required social security contributions for the required period of years. (The calculation is very complicated.)
Taking your pension at age 62 can reduce its value by c25 per cent, which may help explain how the “average” monthly social security pension in the US in 2020 is just $1,503.
In Canada, where the CPP can also vary depending on income and is capped at CDN$1,176, there is also second payment, a flat Old Age Security Payment of $614 for all 65 year olds, but the average, combined state income is currently CDN$1,286 and not $1,790. Both systems have other supplementary payments for low income retirees, and American pensioners are entitled to Medicare coverage.
Income disparity is one of the reasons why the average US and Canadian state pensions are lower than the advertised ceilings, but also because more than a third of men and women in the US access their pension from age 62.
Undoubtedly many take their pensions early because of ill health or because of a long, tough working life in construction trades, hospitality and retail. A minority may have substantial high incomes and assets (and a big salary at 62) and would still be entitled to a large pension, even at 75% of its full value.
Those who postpone collecting their pensions from age 65 to 70 are far fewer, and usually include people who are happy to keep working and don’t need the income right away, or figure they will need the extra value at age 70.
We won’t know until next summer about the definitive retirement age, let alone whether it will include some claim flexibility.
Every retiree’s case will be different, say Royal London, and they’re right: It all depends “on your finances, health, life expectancy and taxes.”