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Retire at 67 for a higher pension? New regime begins in January

Whether you are continuing to work, your overall income, the rate at which you pay tax and your health are all factors that you need to consider

Deferring your pension can be to your advantage, provided you live long enough to benefit. Photograph: iStock

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Fiona Reddan
Tue Dec 12 2023 - 05:00

What pension will I get?

Retirement age weekly payment (€) 2024

  • 66: €277.30
  • 67: €290.30
  • 68: €304.80
  • 69: €320.30
  • 70: €337.20

Source: Department of Social Protection

After much discussion, making of decisions and subsequent rowing back on those same decisions, January will herald a new regime for the State pension – one which is significantly different from all that have gone before.

An increase in the pension age to 67, and possibly higher thereafter, was to be introduced back in 2021 as a way of dealing with the rising costs of an ageing population and a shrinking workforce, but it was withdrawn amid much opposition at the last general election.

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Instead, the Government has opted for a different regime, where you will be rewarded for voluntarily pushing out the age at which you draw down the pension.

The new regime will apply from next month. So what do you need to know?

Who will it impact?

First of all, if you have already retired and are already drawing down your State pension, the new regime will have no impact on you.

If, however, you are set to retire in the years to come, when your State pension kicks in is going to become a more important part of your pension planning. It is people who were born in 1958 and after who are likely to be most impacted.

“As the measure is being introduced for those who turn 66 from January 2024, the first people to be eligible for a higher rate will be those who turn 67 in January 2025,” says a spokeswoman from the Department of Social Protection.

If you are thinking of deferring, you need to consider your options carefully and then apply to the department, specifying the date you wish to claim your pension. According to the department, this date provided can be no more than six months before the date the application is submitted.

“This means the person cannot, at age 67, specify a drawdown date of his/her 66th birthday, for example,” says the spokeswoman.

If a person changes their mind before receiving their contributory pension, they must notify the Department of their new preferred date. Once the pension is paid, the date cannot be changed.

So, if you’re going to defer, you should be clear from the outset.

Retire or wait?

The big decision for those impacted will be whether to defer or not.

Under the new regime, you will be able to pick the age at which you draw down your pension. If you opt for age 66, you will get the standard payment (€277.30 a week from January) – but if you push it out to any age up to 70, you could benefit from higher payments.

The numbers that postpone drawing down their State pension may be higher than expected; a survey last week from Royal London Ireland found that just one in three workers expects to retire at the age of 66.

“No doubt it will be a very individualised choice,” says Paul Kenny, former pensions ombudsman, and course leader at the Retirement Planning Council of Ireland. “It’s going to boil down to the individual person.”

However, he thinks the new regime will prove attractive to those who want to stay on in the workforce.

“A lot of people would like to stay on in their job, management are happy with them staying on and they’re not being compelled to retire any more,” he says.

A big disadvantage for those who continue to work at present while drawing down their State pension at the age of 66 is that they may be heavily taxed on it, as the State pension is taxable once your income exceeds a certain amount – although you won’t pay PRSI or USC on it.

“You’ll get the pension all right, but you’ll pay tax on it, so possibly 40 per cent of it will vanish,” he says.

This means that if you do decide to keep working, financially you may be better off if you defer your pension. And if, as is likely for many people, you move to a lower rate of tax when you do retire, you’re going to keep more of that pension.

Deferring may also suit those who want to work later and build up greater entitlements, as they may not meet the minimum requirement for State pension benefits (currently 520 weeks/10 years), or those who want to boost their entitlement towards the maximum pension payable by increasing their PRSI contributions. You need 2,080 contributions (40 years) to qualify for a full pension.

Crunching the numbers

Ultimately, for those who qualify for a full pension at 66, it might come down to whether or not you think you’ll live long enough to benefit in full from it.

Some people have criticised the rates of payment, arguing that you’d have to live to at least 86 in order to enjoy the full benefit of deferring your pension. However, if you are going to keep working, tax will eat into your payments, which can affect this calculation.

“You’re taking a bet against your own longevity,” says Kenny. “The later you retire, the less time on average you would expect to collect the pension.”

Figures for 2024 show that retiring at the age of 66 will give you an annual income of about €14,500 a year, increasing to about €15,850 a year for someone aged 68, and €17,500 for someone who only draws it down at the age of 70.

Of course, these weekly rates are likely to change in years to come but, as the department spokeswoman notes, the rates shown in the table provide an indication of the scale of the actuarial increases that will apply.

This translates into an increase of about 4.5 per cent if you hold out until 67; 10 per cent until 68; 15.5 per cent until 69; and 22 per cent until the age of 70.

If you assume that someone taking the pension at 66 is paying income tax at the higher rate, their €277.30 weekly payment actually gives them a benefit of €136.38.

If they were to defer the State pension to 70 when they might be on a 20 per cent income tax rate, the €337.20 they receive at that point would be worth €269.76 a week to them in their pocket. On that basis, they would have “made up” the money sacrificed by delaying drawdown of the pension shortly after turning 74.

However, if they are still paying tax at the higher rate at 70 for whatever reason, it would take them 8¼ years to bridge the gap. And if you were on the lower tax rate on both dates, the gap would be even longer – close to 11.4 years.

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The reference to the age of 86 by some critics presumes no tax is payable on the pension at either age.

“When I started working in pensions 50 years ago, if a man lived to the age of 65, on average they’d live for about 13 years more, and a woman about four years longer than that. Right now, if a man gets to 65 he’s likely to live another 21 years on average, and a woman about 24.5 years,” says Kenny.

Given such expectations, an Oireachtas committee recently suggested that the deferred pension age should be increased to 75.

For Kenny, one downside of the new regime is that it only facilitates those who want to work later – not those who want to retire earlier.

“It’s a one-way street, there’s probably a cohort of people who’d like to be able to get the pension a little bit earlier,” he says, noting that some people’s ill health determine they need to stop working earlier rather than later.

He suggests that the Government should consider applying a similar actuarial calculation to those who want to retire earlier.

“I reckon you would get about €250 a week at 65,” he says, noting that this is higher than the current rate of €232 a week paid out to those who retire at age 65 from January 2024.

Another issue is whether or not your employer will allow you to keep working. While many employers are now taking a more flexible approach on retirement dates, others still enforce a compulsory age of 65, or 66. If this is the case, then there would unlikely be a reason to defer your payments.

Boost for carers

As well as greater flexibility on when you retire, another change from January will be the increased State pension coverage for carers. This means that those who have cared for someone full-time can apply for long-term carers’ contribution on their PRSI record. This can help them meet the requirements for a State pension.

Key to this, however, is that carers can only qualify through these contributions for a State pension once they already have a minimum of 1,040 weeks, or 20 years.

In addition, carers should not have worked, or be in education, for more than 18.5 hours a week, to qualify. You can apply for your contributions via MyWelfare.ie.

While the aforementioned changes are pretty seismic when it comes to how the State pension operates, 2025 will bring an even bigger move, when how your pension is calculated starts to move over to the new Total Contributions Approach (TCA). This will affect everyone retiring in 2025 and after – so those born in or after 1959.

Whether you are 30, 40, 50 or 60, understanding how your pension contributions stack up always makes sense. You can request a contribution statement through MyWelfare.ie. You will just need a MyGovID account to access.

This statement will tell you how many contributions you have made up to the end of the last tax year, as well as any credits, such as the Homemaker’s Scheme, you have applied for.

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