Retirement pension: how is it calculated?
We are going to explain how you can calculate the pension benefits you will receive after retiring.
The first thing you need to do to calculate your state pension is to add up all your social security contributions prior to retirement. If you add all these amounts together you will obtain your base figure, to which certain percentages must be applied (which will vary depending on your age), the amount of time you intend to deduct from or add to the standard retirement age and, of course, how many years of social security contributions you have.
The standard retirement age is currently 65 years and 6 months, except if you have 36 years or more of contributions, in which case you can retire when you are 65. The age of retirement will increase by one month per year until 2020. It will then start to increase by two months per year until 2027, at which point the legal age of retirement will be 67. At that time, anyone who can verify at least 38 years and 6 months of contributions will still be able to retire at age 65.
The current system does more than just raise the legal age of retirement. Also increasing is the time a worker needs to pay in to receive 100% of the pension from 35 to 37 years in 2027. Currently at least 35 years and 6 months of contributions are required.
How many years do I need in order to calculate the regulatory base for my retirement pension?
If a worker expects to retire in 2016, the regulatory base will be calculated based upon the last 19 years of contributions. Multiplied by the 12 months of the year, this gives a result of 228. Every year this threshold increases by 12 months. To continue with the calculation, the regulatory base must be divided by the divisor, which is the result of multiplying the number of years of contributions by the total number of payments (14). In this case, our current figures are 19 years by 14 payments, which gives a result of 266. Every year there is an increase by 14.
This means that for 2022 and thereafter, the regulatory base will be the result of dividing the worker's contribution bases during the 300 months prior to the month or retirement by 350.
Minimum requirements for a retirement pension
- Workers must have paid contributions for at least 15 years. Two of those years must fall within the last 15 calendar years prior to the date of the retirement request.
- You must have reached the relevant standard retirement age in order to claim your pension.
- In 2018, you can claim your pension at 65 if you have 36 years or more of contributions. If you have made contributions for less than 36 years, then your retirement age is 65 years and 4 months.
What if I am a self-employed worker?
Although self-employed individuals are subject to many kinds of legislative and tax requirements, they are entitled to retire early in the same way as company employees if they take voluntary early retirement.
The law establishes the same requirements in the case of a voluntary job dismissal. You can retire early at age 63, as long as you have made contributions for at least 35 years. As in the general system, the retirement age is increasing up until reaching age 67 in the year 2027, which means that the age of early retirement will then be 2 years fewer at age 65. Self-employed workers cannot take advantage of the non-voluntary early retirement option.
How do the calculations work?
Calculating the first retirement pension that we will receive benefits from can be divided into the following steps:
- The first step involves calculating your social security base figures for the years preceding retirement. As explained above, in 2016 the last 19 years prior to retirement are now taken into account -
- Once you know what these figures are, you must add them together and then divide them by 266. This result is the figure known as the regulatory base. However, this must not be confused with the retirement pension. To get that figure, you need to make a series of adjustments to the regulatory base.
- The base figure must be adjusted depending on how many years of contributions you have made over the course of your working life. After paying in for 15 years, you have a right to 50% of the regulatory base. To receive 100%, you must have paid in for 36 years.
The base figure for workers who claim their pension before reaching the standard age will be subject to a reduction, depending on how early they retire.
On the other hand, if a worker meets the requirements to retire but delays his or her retirement beyond the ordinary retirement age, their regulatory base will be increased, depending on the number of full years that retirement is delayed.
Let's look at a specific case
Assuming you are a worker aged 65 years and 4 months who can prove 33 years of social security contributions. Your contribution bases total €345,000. It must be remembered that the contribution bases are updated via the CPI, except for the 24 nearest to the causal act, which are taken at their nominal value. The regulatory base will therefore be the quotient between €345,000 and 266, i.e. €1,296.99.
Since this worker has reached the ordinary retirement age and has made at least 15 years of payments (and with 2 of those years being within the 15 years prior to retirement), this worker has the right to receive a pension.
Now we have calculated the regulatory base. The next step is to apply a percentage to it, based upon the number of years of contributions. This can be divided into the following steps:
The worker has paid in for 33 years, i.e. 396 months, for which they will receive part of the pension based on those years, but not 100%, for which it is necessary to have paid in for 426 months or more.
- For the first 15 years, i.e. 180 months, a percentage of 50% applies.
- For the following 163 months, 0.21% is added for each additional month.
- And for the following 83 months (i.e. months 344 to 426), another 0.19%.
In our case we have 396 months of contributions, so we must calculate:
- 180 = 50%.
- 163 x 0.21% = 34.23%.
- 53 months x 0.19% = 10.07%.
In this way, the worker will receive 94.3% of the total of the regulatory base. In other words, 94.3% of €1,296.99 or 1,223.06 €.
In Spain, the average pension is almost €1,000. The maximum retirement pension in 2016 was €2,567 a month. The minimum was €636.
With the collaboration of the BBVA PENSIONS Institute:
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