Thursday 21 September 2017

Pay Related Social Insurance (PRSI)

PRSI for self-employed individuals was first introduced for the tax year beginning on the 06th of April 1988. This allowed self-employed individuals qualify for a state pension and the survivor’s pension for the first time as long as they met the required conditions.

By paying PRSI as a self-employed individual you are paying PRSI at Class S. This class of PRSI gives an individual an ability to receive a limited number of Social Welfare payments such as:

• State Pension

• Survivor Pension

• Maternity Benefit

• Adoptive Benefit

• Treatment Benefit Scheme

Under the current rules if you reach pension age on or after 06th April 2012, you need to have 520 full-rate contributions i.e. 10 years in order to qualify for a pension at the age of 66. In this case, only 260 of the 520 contributions may be voluntary contributions.

Since PRSI was first introduced for the self-employed we have seen changes to PRSI on an almost annual basis. As I have stated at present the current pension age is 66 however as per the Social Welfare Pension Act 2011 anyone born after 01/01/1955 will have to wait until they reach 67 to claim the pension and anyone born after 01/01/1960 will have to wait until they are 68 to claim the pension. For people in the latter scenario this will take €24,000 away from their future State Pension.

As the Social Welfare budget is one of the largest budgets the government has to deal with they are always looking for ways to reduce this outlay while causing the least amount of public outcry. One of the last measures introduced by former minister Joan Burton was to expand the number of categories which determined how much of a state pension you were entitled to from four to six. While this didn’t seem to be of too much consequence at the time it in effect meant anyone who had a number of years where no PRSI was paid went from being able to get a pension of €225 per week down to €203 per week. This equates to a reduction in an annual pension of €1,144 or €11,440 over a ten year period, which in this day and age of longevity is easily achievable.

At present the state pension is calculated based on an average system i.e. the total contribution divided by the number of years you could have paid PRSI. It has been suggested that from 2021 the method by which pension entitlement is assessed will likely change to a “total contributions based model”. This could potentially mean you will need to pay PRSI for 30, 40 or even 50 years to be entitled to a full rate pension. It has also been suggested that an individual could continue to work after they reach retirement age (i.e. 66, 67 or 68 depending on when you were born) in order to improve their PRSI record to enable them to receive a higher rate of a pension once they do retire.

With all these recent changes and potential future changes it is imperative that you continue to pay PRSI each year through your self-assessed returns and if that is not possible then you should register as a Voluntary Contributor. Changes to the Voluntary Contributor rules mean that you can now back pay PRSI for 5 years. The option to pay Voluntary Contributions should only be to augment a future pension entitlement otherwise they could be a complete waste of money.

In recent months the Social Welfare have launched a new service under “My Gov ID” which allows anyone to set up an account with the Social Welfare and be able to have access to their PRSI record as long as they have a verified basic account. I would highly recommend that anyone reaching pensionable age in the next 10 years set up an account so you can see what your PRSI record is like. This gives you ample time to make sure you can continue to pay PRSI and if needs be back pay for any recent years you may have missed out on paying PRSI.

PRSI is a complex and often complicated issue due to the nature of PRSI contribution from different types of employments in Ireland therefore it is extremely important to ensure that your record is up to date and intact.

Should you wish to discuss your PRSI record or any other issues in relation to the above please don’t hesitate to contact us.