A financial planning expert claims the changes to the state pension (contributory) entitlement make it a fairer and more transparent system, particularly for women.
Up until the end of 2024, a person’s state pension (contributory) was calculated using two methods – the Yearly Average (YA) and the Total Contributions Approach (TCA).
Financial expert Kieran McAuliffe, a director at pension consultancy firm Provest, says the YA method created anomalies, particularly for women.
“The main anomaly within the YA calculation method arises where a person has a gap in their social insurance contribution record, possibly from periods spent caring for family or travel, and qualifies for a lower pension entitlement than a person with the same number of social insurance contributions. This occurs as their Yearly Average is calculated over the person’s entire ‘working life’.”
Under the YA method, a person must have an average of 48 contributions per year since they first entered insurable employment. Under the TCA method, they must have 2,080 contributions – the equivalent of 40-years – and can include up to 20-years’ home caring periods or PRSI credits. The most beneficial payment is then awarded to the individual.
This method is now being phased out over the next 10-years which Mr McAuliffe says is necessary to avoid a “cliff-edge effect”.
The phasing out period means that in 2025 a person claiming the state pension will be awarded the higher of the pension calculated on the TCA or a pension based on 10% of the TCA pension plus 90% of the yearly average pension.
In 2026, this will change to 20% of the TCA pension and 80% of the yearly average pension and so on.
By 2035, only the TCA will be used to determine the rate of the state pension for an individual. Mr McAuliffe says this method more closely reflects the social insurance contributions made by a person and is therefore a fairer and more transparent method.