Can you rely on the State pension to carry you through retirement?

While many of us hope retirement is farther away than it might really be, eventually it creeps up on us. However, when we think about our future finances we know we always have the State pension to rely on – or do we? And if we don’t have enough PRSI contributions, where will that leave us?

Relying on the State (pension)

Life expectancy is on the rise, says Nicholas Charalambous, managing director, Alpha Wealth.

“While this is a positive development, it also means that you will need financial resources to support yourself for a longer retirement period,” he adds. “Governments worldwide are grappling with the sustainability of State pension programmes.

“In Ireland, for instance, the Government has already taken steps to address this by increasing the retirement age. This means that if you were born in 1961 or later, you won’t qualify for the State pension until you reach 68.

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“This delay can create a significant gap between when you hope to retire and when you can access the State pension.”

Two State pensions

The State Pension (Contributory) is a PRSI-based payment made to people from age 66; it is not means tested. A person can receive payment of State Pension (Contributory) and continue to work or receive income from another source. According to the Department of Social Welfare (DSW): “As the social insurance (PRSI) conditions are very complex, you should apply for a State Pension (Contributory) if you have ever worked in Ireland and have paid PRSI contributions (stamps) at any time.”

If you retire at 65 you may be entitled to a benefit payment until you reach 66. To qualify “you must have stopped working and meet the (PRSI) social insurance conditions”, the department says.

The State Pension (Non-Contributory) is a payment for people aged 66 and over who do not qualify for a State Pension (Contributory). It is means tested and taxable, though unlikely to be taxed if it is your only source of income.

“The current State pension in Ireland, while a valuable source of income, may not be sufficient to maintain your desired standard of living in retirement,” says Charalambous. “As of now, it’s just over €1,000 a month and this may not be enough to cover all your expenses.”

The recent Budget stated it is to increase by €12 from January 2024.

Other benefits available

If you solely rely on the State pension you might be eligible for other benefits such as housing support or medical cards, depending on your circumstances, says Charalambous. These can provide additional assistance in retirement.

Early retirement

The DSW says if you retire early, “make sure you go on paying PRSI contributions, or that you are getting credited contributions (if you are eligible). This can help you get a contributory pension when you reach 66.”

Voluntary contributions

Voluntary contributions can help maintain your social insurance record and help you qualify for social insurance payments in the future.

“They cover long-term benefits such as pensions. They do not cover short-term benefits for illness, maternity or jobseekers,” says the DSW.

“You can choose to pay voluntary contributions (if you are under 66 and meet the other conditions) if you are no longer covered by compulsory PRSI in Ireland, are no longer covered by PRSI on a compulsory or voluntary basis in another EU country, if you are working outside the EU and not subject to Irish or EU social insurance contributions you may also opt to pay voluntary contributions.”

If you are taking time off work to care for children under 12 or a disabled child or adult the Homemaker’s Scheme may be a better option than voluntary contributions.

Changes to State pension

While there is the State pension to rely on, certain factors influence how much is available. An ageing population will put extra pressure on the State pension, for example.

“As the population ages, there will be fewer people in the workforce compared to those who are retired,” says Charalambous. “This demographic shift puts additional pressure on the funding of the State pension as it relies heavily on taxes paid by working individuals. In the coming decades there may be even greater strain on the system.”