State Pension Overview

The concept of pensions dates to the time of Julius Caesar in Rome. Fearful that retired soldiers may instigate an uprising against the Emperor, Caesar introduced ‘praemia’ for them. This paid soldiers a multiple of around thirteen times their final salary in a lump sum after twenty years of service. This initiative laid the groundwork for modern national pension systems worldwide, featuring service prerequisites and calculations tied to final salaries that endure to this day.

Thousands of years later, the Old Age Pensions Act of 1908 was enacted by the UK Parliament, extending to Ireland as well. This legislation formed the basis for the State Pension entitlement in Ireland, where eligible individuals aged 70 and above received 5 shillings per week starting from January 1, 1909. Although deemed modest at the time, it was intentionally set low to incentivise personal retirement planning and discourage overreliance on the government. 

Certain core principles remain unchanged, such as residency requirements, while public calls for higher pension amounts remain consistent then as they do today. Additionally, inadequate retirement preparation among individuals persisted during that period and continues to pose a challenge in modern national pension systems.

In Ireland, employers, and employees both pay Pay Related Social Insurance (PRSI) on their earnings, depending on the level of income. This tax is used to contribute to Ireland’s social insurance fund, where pensions are drawn from. PRSI rates in Ireland are set to have a series of staged increases each year starting in October 2024, with five planned increments until 2028. Once fully implemented, these hikes are projected to generate €240 million in revenue.

In light of media scrutiny and wide scale public outrage, plans to increase the pension age in Ireland from 66 were quashed. Instead, the Government proposed the option of deferring receipt of the State Pension until age 70, allowing individuals to receive a higher weekly pension amount in return for delaying receiving benefits.

Within financial advisory circles, and in particular around retirement planning, four primary pillars are identified for retirement provision. With longer life expectancies, the expenses associated with maintaining State Pensions have risen significantly each year. Currently, only two-thirds of individuals in Ireland receive the full rate of State Pensions (Contributory). However, through careful consideration and planning, this figure can be augmented.

Nevertheless, a pressing concern persists regarding the Government's ability to sustain current pension payment levels. In 2023, the cost of servicing pensions surged by 17% compared to the previous year, while a minimal 0.1% PRSI increase is scheduled from October 1st, 2024. This apprehension is likely to precipitate significant reforms in the Irish pension system. Ireland lags the EU average in terms of State Pension levels. Between 2019 and 2021 Ireland’s Government Pension spending equalled 3.3% of GDP spending, notably below the OECD average of 7.7% (however as is usually the case with GDP percentages, the high level of multi-national activity in Ireland may make these comparisons less relevant).

 The changes announced in Budget 2024 aim to reduce the State Pension entitlement for those without 40 or more years of paid contributions, which is considered a full working life. While the pension rates have risen, the criteria for calculation have become more rigorous, now considering the entirety of an individual's working life. 

In a series of blog posts over the next few weeks we will look at the State Pension in greater detail, specifically the eligibility criteria, levels of payments and generation of PRSI contributions.

 Note:

This document is based on our understanding and research from the Dept of Social Protection as well as input from third party advisors. It is not exhaustive and some of the information/ practice is subject to interpretation.