Record-high increase in pensions in 2023 – When is a good time to retire?
The turn of the year is approaching, and pensioners are anxious to find out how much their pension will increase next year. Gross pensions rise annually, but the modest increases of previous years have had little impact on pensioners’ daily lives. That has been true especially if the increase has led to a rise in the pensioner’s tax rate, eating away a large chunk of the increase. This year things will be different: inflation also influences people’s choices about when to retire.
Increases of this scale have not been seen in pensions since 1990. According to estimates, we could be looking at an increase of more than 6.9 per cent. This places pension applicants in an unusual situation: some of those approaching retirement age or postponing their retirement face a tough choice. In order to gain advantage of next year’s approximately 6–7 per cent index increment, it might be a good idea to retire before the end of this year. Of course, it is up to each individual to decide when they wish to retire.
Pensions are rising, which means that prices have risen
In practice, pensions are affected by two indices: the earnings-related pension index and the wage coefficient.
- The earnings-related pension index increases current pensions annually, with 20 per cent of the increase being based on the rise in the earnings level and 80 per cent on the consumer price index. The higher the earnings-related pension index, the more commodity prices have risen.
- The wage coefficient ensures that the earnings gained during the career will retain their value. When determining the wage coefficient, the change in the price level accounts for 20 per cent and the change in wage-earners’ earnings level for 80 per cent, i.e. exactly the opposite of the earnings-related pension index.
When you apply for pension, all the wages you have earned during your career, which will be used to calculate your pension accrual, will be increased to the level of the retirement year using the wage coefficient. Once you begin receiving pension, the earnings-related pension index will be applied every year instead of the wage coefficient. The table shows how exceptional the year 2023 will be. The earnings-related pension index will be higher than the wage coefficient.
|Year||Earnings-related pension index – change from previous year, %||Wage coefficient – change from previous year, %|
|2023||6.9 (forecast, August 2022)||3.7 (forecast, August 2022)|
The larger your pension accrual, the larger the impact of the time of retirement on the amount of pension. If you have already retired, you can see the amount of your pension in 2023 in our MyPension service at the start of December. For the time being, the service is only available in Finnish and Swedish.
Is it better to retire in December or in January?
Those who approach retirement age at the turn of the year often wonder what the best time would be for them to retire. Exceptionally large index increments are adding some extra zest to a decision that may have an impact of tens of euros on the final pension amount.
However, each and every person needs to make that decision themselves. Different people have different work histories and there may be a number of factors that come into play. Pension specialists will help you the best they can, offering you the tools you need to make the decision.
Applying for old-age pension at the turn of the year
- If you were born in December 1958 or thereafter, you cannot gain the maximum benefit from this year’s earnings-related pension index increment. If, in terms of your age, it is possible for you to apply for partial old-age pension already in December 2022, you could benefit from the index increment at least partially. If you apply for old-age pension in 2023, your wages will be in any case multiplied by the wage coefficient, which will also be reasonably large.
- If you were born in November 1958 or earlier, you have the opportunity to take advantage of the index increment by starting to withdraw your old-age pension no later than on 1 December 2022. Be sure to terminate your employment relationship before your pension starts. If you do not wish to end your employment relationship but you do wish to make the most out of the January earnings-related pension index increment, you can choose to start withdrawing partial old-age pension on 1 December 2022. If you apply for the pension before 1 December 2022, you will also benefit from the January index increment.
Did you know that you can work even while on a pension? That means that you can start withdrawing pension in December and, under certain conditions, conclude a new employment contract alongside the pension. You do not need to make the decision at the turn of the year, however, because you can apply for old-age pension retroactively for three months. If you change your mind in February and would like to apply for pension as of the beginning of December, it is possible if your employment relationship has ended no later than in November.
Which to choose: the index increment or the increase for deferred retirement?
If you do not apply for pension at your lower old-age pension age, the increase for deferred retirement will also grow your pension. It will increase your pension by 0.4% for each deferred month. The attached calculations by the Finnish Centre for Pensions show how different index increments affect earnings-related pensions. The calculations are based on August’s projections of next year’s indices.
Example 1: old-age pension
A person’s pension accrual on 1 December 2022 is EUR 1,500 (adjusted with the life expectancy coefficient).
- If the person retires on old-age pension in December 2022, they will receive an increase based on the earnings-related pension index in January 2023. Thereafter, their monthly pension will be EUR 1,604 in 2023.
- If the person retires on old-age pension in January 2023, their previous earnings will be increased to the 2023 level using the wage coefficient when calculating their pension. The amount of the commencing earnings-related pension will depend on the preceding wage level: if the wages are, for example, EUR 3,000 per month, the amount of the commencing earnings-related pension will be EUR 1,565 in January.
The increase for deferred retirement will increase the pension by 0.4% for each deferred month. In the example case, it would be worthwhile for the person to start withdrawing pension in December 2022, if they were not planning to defer their retirement by more than five months. If they were planning to defer their retirement, they should defer it at least until 1 May 2023 in order for the pension amount, including the increase for deferred retirement, to be the same as in the case of withdrawing pension in December.
Example 2: partial old-age pension
A person’s pension accrual on 1 December 2022 is EUR 1,500 (adjusted with the life expectancy coefficient). The person turns 62 in the beginning of December 2022 and their age group’s lower old-age pension age is 64 years and 6 months. The amount of partial old-age pension (50%) in December is EUR 660.
- If the person retires on partial old-age pension in December 2022, they will receive an increase based on the earnings-related pension index in January 2023. Thereafter, their monthly partial old-age pension will be EUR 706 in 2023.
- If the person retires on partial old-age pension in January 2023, their previous earnings will be increased to the 2023 level using the wage coefficient when calculating their pension. The amount of partial old-age pension will depend on the person’s pay level at the time: if their wages are, for example, EUR 3,000 per month, the amount of the commencing partial old-age pension will be EUR 689 in January.
Write down pros and cons
Every option has its pros and cons. For some people, leisure comes before anything else, while for others even the final months that accrue pension matter.
When talking about changes in terms of percentages, the differences are considerable when larger amounts are involved. For this reason, it is difficult to advise all pension applicants to take a particular course of action at the turn of the year. Pension matters are individual, and that is why you should explore the various options well before filling in an application.
By the way, have you checked your pension accrual in the pension record? Please note that MyPension service is currently only available in Finnish and Swedish.
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