For many farmers, the sale of an outfarm or town house is the pension pot that keeps them going when the next generation has taken on the farm. Often funding retirement is a major concern for those older farmers passing on the farm to the next generation. Many Irish farmers find themselves in a situation at retirement age where they fail to qualify for the State contributory pension or non-contributory pension, leaving them with little choice but to work into their retirement years or be financially dependent on family members in their old age.

A recent study by Maynooth University showed that low-income farmers can fail to qualify for either the State contributory or non-contributory pension. Why is this? The history of the PRSI system for self-employed businesses means that retiring farmers often fall short of the required 40 years of PRSI contributions needed to qualify for the State contributory pension.

Farmers may not have made the voluntary contributions necessary to qualify. Of course, another reason often the case on Irish farms, is that many farmers did not inherit their farm until later in life. Many have completed 10 years of work on the farm but are often not recognised as being in employment and hence not subject to PRSI. Spouses and partners who may have worked on the farm may be similarly affected.

Doyle outspoken

IFA farm family and social affairs chair Alice Doyle has recently urged female farmers to make PRSI contributions when carrying out tax returns this year. She said they should take the time to check what PRSI contributions they have made to-date and plan ahead for their pensions.

“As we approach the closing part of the year, consideration should be given to reviewing your PRSI record of contributions to-date.”

“This is important in terms of planning for your future entitlement to the State pension and may provide the opportunity to enhance future benefits,” she said.

Doyle added that many female farmers who are retiring discover that they are not entitled to the State contributory pension, as they have not made sufficient PRSI contributions.

This, she said, is despite having worked on the farm all their lives.

“It is important to be aware of this issue when planning for the future,” she said.

Means-tested non-contributory pension

So what happens if you haven’t enough PRSI contributions? Farmers who do not qualify for the State contributory pension turn to the State non-contributory pension for retirement income. The State non-contributory pension is means tested and the calculation of an individual’s means can be complicated.

Typically, for any given year, it incorporates calculating the cash income of the individual as well as imputed income from the individual’s property and investments other than their private dwelling.

In the Maynooth analysis, case study farms were created to reflect farmers with no private pension and variable PRSI contribution histories to assess their entitlement to the State contributory pension and/or State non-contributory pension. The findings showed that farmers who do not have sufficient PRSI contributions to qualify for the State contributory pension are unlikely to qualify for the State non-contributory pension, unless they divest themselves of the majority of their farm assets.

For a single farmer to qualify for full State non-contributory pension, they cannot have capital assets exceeding €50,000 and capital assets of between €50,000 and €100,000 would entitle them to a reduced pension only. Capital assets over €100,000 would result in no entitlement.

Farmers, and if applicable their spouses/partners, who on retirement wish to transfer the family business to a designated successor, cannot retain anything other than a few acres of land to have entitlement to the State Pension Non-Contributory.

As is the case on many Irish farms, farmers who wish to retain some land or buildings for one reason or another could potentially have no entitlement to a State pension. This could result in them working past retirement age and relying on farm income, or the financial support of their children, in their old age.

Of course, those on the outside looking in might suggest these farmers sell off land or buildings to fund retirement. However, as is the case with most Irish farms, inter-generational succession and attachment to land slows many decisions.

The Maynooth researchers suggest that a compulsory PRSI contribution system which gives all farmers and farm successors access to the State contributory pension would be a positive development.

Pension age

Economist Colm McCarthy recently wrote in this paper that Taoiseach Micheál Martin committed his party and, presumably, the Government, to paying the old age pension at 66.

Prior to the last general election in February 2020, it had been the Government’s intention to increase the pension age gradually, to offset the persistent improvements in life expectancy.

McCarthy argues that there are two good reasons why the pension age should rise as life expectancy improves. The first is that State pensions must be financed, and somebody has to pay. Under the Irish system, this would mean higher direct payroll taxes on the labour force. An Taoiseach acknowledged that higher PRSI, for employers and employees, will now have to be levied.

But there is a second reason, regardless of the mechanics of financing the payouts. In any society, the supply of goods and services from the efforts of the employed workforce is distributed in part to non-workers.

This group consists of children, the retired and those in the working age groups unable to work for various reasons, including infirmity.

PRSI is just another form of taxation on earned income, whether paid by employer or employee, and most workers regard it, correctly, as an add-on to income tax.

Farmers with a pension plan

When it comes to farm businesses that have a pension plan for themselves and/or employees, I asked Martin Glennon, head of financial planning with ifac, what the biggest changes in the pensions space were of late. He told me that director pensions were effectively closed since July 2022.

“Directors pensions (executive pensions) are closed due to regulations imposed on one-member arrangement (OMA) occupational pension schemes. The Pensions Authority has insisted that OMAs require annual reports and audited accounts (normally a requirement for schemes with 100+ members),” he said.

“This will impose a large increase in fees for these schemes. Life assurance companies immediately closed these schemes to all new business (in July 2022).”

So what happens to those that want to save for retirement? Martin said: “The only option for company directors to save for their retirement is through a Personal Retirement Savings Account (PRSA). PRSAs were a type of savings account created almost 20 years ago in 2003 to improve pension coverage. The issue with PRSAs is that the employer cannot fund for previous years’ service, and any employer contribution is treated as an employee contribution and offset against an employee’s age-related annual limits.

Martin also said that existing executive pensions will also be affected. Those established after 22 April 2021 are required to comply with the regulator’s additional requirements immediately. He said: “Schemes established prior to 21 April 2021 have until 22 April 2026 to remain and incur the additional costs, or make alternative arrangements.”

What has happened recently on pension performance? Martin said: “Pension fund performances are down year to-date. How much depends on the risk level, but ranges from -4% to -13%. This is mainly due to high inflation, the war in Ukraine and the rise in interest rates, which affects bond valuations and subsequently, cautious pension funds.”

On the plus side, Martin said the rise in interest rates has led to an increase in annuity rates. Annuities were out of favour in the last few years due to the low interest rate environment. Those who are retiring and those who have funds in an ARF can purchase an annuity at increased rates.

Risk profile

FBD’s Seamus Costello said: “If there is one piece of advice worthwhile at the moment, it is for those within five to 10 years of retirement to have a meet up with their pension advisers and discuss the risk profile of the pension funds.

“Some might decide to ringfence funds or review the charging structures in place because there is better value in some of the new schemes,” he said.

Seamus explained that many of the lifestyle funds often transition from equities to cash/bonds as the policy matures and if there was an economic downturn globally, not having some equities in the mix might prevent the fund recovering.

For those farming in companies, Seamus expects some changes and some new products to be announced in the coming weeks.

As a general comment, he suggests that funds have been up and down throughout 2022, but most of the medium to low-risk funds he expects would be just about level for the year so far.

In brief

  • Many Irish farmers find themselves in a situation at retirement age where they fail to qualify for the State contributory or State non-contributory pension.

    The IFA farm family and social affairs chair Alice Doyle has recently urged women farmers to make PRSI contributions when carrying out tax returns this year.

    PRSI is just another form of taxation on earned income, whether paid by employer or employee, and most workers regard it, correctly, as an add-on to income tax.

    Directors’ pensions (executive pensions) are closed due to regulations imposed on one-member arrangement (OMA) occupational pension schemes.

    For those within five to 10 years of retirement, it is good advice to meet up with pension advisers and discuss the risk profile of the pension funds.