Noel Grealish (Galway West, Independent)
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317. To ask the Minister for Employment Affairs and Social Protection if the normal average rule for calculating a State pension (contributory) can be used when a person continues to work between 66 and 70 years or if the total contributions approach must be used; and if she will make a statement on the matter. [40076/24]

Heather Humphreys (Cavan-Monaghan, Fine Gael)
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Following on from the Pensions Commission's recommendations, a number of State pension reforms were enacted in the Social Welfare (Miscellaneous Provisions) Act 2023, which represent the biggest ever structural reform of the Irish State pension system.

Among these reforms was the introduction of a flexible State pension system for those turning 66 on or after the 1st January 2024.

Those who avail of the flexible pension option can, on reaching pensionable age (66), defer access to their State Pension (Contributory) up to the age of 70 and receive an actuarially adjusted higher rate of payment. A person can use the period between 66 and 70 years of age to build up additional entitlements and, if a person has less than 10 years PRSI reckonable paid contributions, they may be able to use this period to establish entitlement. Those who defer claiming their State Pension (Contributory) and continue to work, will have access to certain short-term contingency payments during the period of deferral.

A further reform introduced under the 2023 Act is the ten-year phased transition from the Yearly Average (YA) method of calculation of State Pension (Contributory) to the Total Contributions Approach (TCA) as the sole method of calculation.

TCA resolves many of the anomalies arising from the YA calculation model. The main anomaly within the YA calculation method is that it is possible for people to start paying social insurance later in their working life and yet qualify for a pension at maximum rate. Entitlement to a full pension can in some cases be achieved from as little as ten years of social insurance contributions. Another anomaly 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’.

TCA is a fairer and more transparent method of calculating the contributory pension as it more closely reflects the social insurance contributions made by a person during their working life.

The ten-year transitional arrangements are to avoid a ‘cliff edge’ effect. The first year of phasing-out begins in January 2025. During this transition period, pension rates will be based on best of the TCA, or a combined rate based on mix of Yearly Average and TCA, with the proportion accounted for by Yearly Average reducing from 90% to zero over 10 years and the proportion accounted for by the TCA increasing commensurately. From 2034, all State Pension (Contributory) calculations will be through the TCA method only.

If a person chooses to defer their State Pension (Contributory), the rate will be calculated based on the methods of calculation in the year that they drawdown their State Pension (Contributory) and not the year they reach pensionable age. For example, If a person reaches pensionable age (66) in 2025 and decides to defer drawing their State Pension (Contributory) until age 67 in 2026, the rate of State Pension (Contributory) will be calculated using the methods of calculation applicable for 2026.

I trust this clarifies the matter for the Deputy.