This article is a continuation of the first part, in which I discussed the timing of retirement and the fluctuations in earnings shortly before retirement.
The retirement age is currently increasing every year and some people are considering early retirement due to failing health. Other people think about it because they lost their job after 60 and are unable to find a new one, or they want to devote themselves to grandchildren and caring for their sick parents. In the last two years, extraordinary valorizations played a big role in the decision-making, thanks to which in many cases early pensions were financially more advantageous than regular pensions granted later.
Every month I receive a number of questions from people who are dealing with early retirement. Therefore, I decided to write down the answers to the questions that occur most often:
How does the reduction of early retirement work and how much is it?
Many people don’t realize that the financial cut of early retirement can be really big, especially if they head into retirement more than a year early before reaching full retirement age. In addition, in 2023, the rules for early retirement were significantly tightened, and the reduction is now more drastic.
It used to be that the shorter the period of prematurity, the lower the percentage reduction was. So if someone retired a few months early, they didn’t feel much financially, and in some cases it was even advantageous. However, this is no longer the case, as the reduction in pensions is large and in many cases can come as an unpleasant surprise.
According to the current rules, there is a reduction of 1.5% of the calculation basis for every 90 days of prematurity. It is not about reducing the entire amount of the pension, as many think, but about reducing the calculation basis, i.e. a kind of lifetime monthly earnings that have already “passed” the reduction limits. (I explain in detail what the calculation base means in this article.)
The amount of the reduction, of course, depends on your earnings. In general, however, it can be said that the reduction for every one year of prematurity amounts to 1000 to 2000 CZK. So if you retire three years earlier, you can easily have a pension of CZK 5,000 less.
The CSSS has also developed a model example that shows the rate of reduction for a person who would have a regular pension of CZK 22,500, which is a slightly above-average pension that new retirees normally have:
- Regular pension: CZK 22,500
- Early retirement 0.5 years earlier: CZK 21,600
- Early retirement 1 year earlier: CZK 20,900
- Early retirement 2 years earlier: CZK 19,600
This reduction is permanent and will not be canceled even after reaching the regular retirement age. However, it is possible to “wipe out” this reduction with further work, which establishes participation in social insurance (more on that later).
If I am granted early retirement, can I still work?
Yes, but to a limited extent. You cannot have earnings and additional earnings that establish participation in sickness and social insurance. This applies to employment, agreements and business. So, for example, you cannot have a job, not even part-time. If you are self-employed, you must not have an annual income exceeding CZK 105,520 (at the same time, it also applies that for each month when the activity was not carried out, CZK 8,794 is deducted from this annual amount).
On the contrary, you can have any income without restrictions, from which social insurance is not paid. This is, for example, rental income, profit shares from companies or other passive income, such as income from stocks, bonds, cryptocurrencies and the like.
It is important to remember that when your income exceeds the maximum limit and you start paying social insurance, your early retirement payment will be interrupted. At the same time, however, these earnings or work activities will begin to count towards your pension. Your additional period of pension insurance will be taken into account, and if you get another full year, your pension will increase. You can also “wipe out” any early reductions, so if you work 90 days, one cycle of reductions will be canceled and your pension will increase.
If I apply for a calculation rejection certificate, can I be at the employment office?
In the last two years, there was a lot of talk about the so-called calculation rejection, which people used mainly in connection with high extraordinary valuations. Basically, it’s a mechanism where you apply for early retirement, but at the same time you ask to suspend the payment of your pension because you want to continue working.
For example, in 2022, it was used by people who planned to work until reaching the regular retirement age, but at the same time wanted to receive an early pension, which was more financially advantageous thanks to extraordinary valorizations. By working and not drawing a pension, they “wiped out” the early reduction I mention in the previous question. At the same time, they were guaranteed favorable conditions for calculating the pension from 2022.
And what about the calculation rejector and the employment office? Yes, it is possible to apply for an early pension, apply for a calculation rejection certificate and at the same time be registered with the labor office and receive unemployment benefits. As a rule, however, this is not advantageous, because unlike normal work (earning activity), during your stay at the labor office, the early reduction is not “erased” and at the same time, you do not receive an additional period of pension insurance. (Many people mistakenly think that the labor office “wipes out” the early reduction in case of rejection, but this is not the case.)
I can think of pretty much the only case where this might be beneficial. You have been granted an early pension, the calculation of which is more advantageous than in the case of a regular pension granted later. At the same time, the amount of your unemployment benefit is higher than the early retirement itself. In that case, it makes sense to use up unemployment benefits for the full length of time (for people over 55 it’s 11 months) and then resume your early retirement payment.
Is early retirement or early retirement more beneficial for me?
First of all, it is necessary to be clear about what pre-retirement is. This is a payment of money from your own commercial pension savings, which is not related to the old age pension which is paid by the state. Basically, this means that you can easily receive an early pension and an early pension at the same time, and the state doesn’t care at all.
In certain circumstances, it may be advantageous to use pre-retirement as an interim period before applying for an early or regular pension. While receiving a pension is not counted as a period of pension insurance, so it will not increase your pension in any way, but it is also an excluded period, so it will not reduce it either. Therefore, if you have finished your job, are unable to find a new one, or do not want another job, you can request an early retirement payment from your pension company and wait for your regular pension to avoid financial cuts due to early retirement.
In this connection, however, it is necessary to keep two things in mind:
- The minimum period of receiving an early pension is 24 months.
- By postponing both the application and the pension, you will receive a higher pension, but at the same time you will lose the pension installments themselves until then. And in this regard, it is good to consider the return between how much you “don’t get” from the state and how long it will take to pay you back financially when you receive a higher pension. I deal more with the question of return in this article.
Is it worth applying for early retirement this year, or should I wait for regular retirement in 2025?
This is a very common question, and as I already wrote in the previous part, I am preparing a separate article on this topic. But I will briefly try to summarize the current situation now.
In this context, it is necessary to realize that we do not yet know the pension coefficients, on the basis of which it would be possible to accurately calculate the amount of pension granted in 2025. The government will only approve the coefficients in the regulation during September, and then it will be possible to compare whether financially more advantageous early retirement from 2024 or regular pension granted in 2025.
In this regard, the development of the economy until the middle of this year will play a fundamental role, specifically the development of inflation and wages. It is also a big unknown whether and in what form the pension reform prepared by the government will be approved. At the moment, the negotiations between the government and the opposition have broken down, so it is likely that the legislative process will be accelerated and the effectiveness of the reform will begin already from the beginning of 2025. How will this affect the calculation of the pension? It will become clearer during the summer, when I expect the third reading in the Chamber of Deputies.
Personally, at this moment, I estimate that it will not be advantageous to apply for an early pension in 2024 (or to use the possible calculation rejection), because the calculation of new pensions in 2025 will be more advantageous. The reason is also that there will most likely be no extraordinary valorization of pensions this year. But please take this prediction of mine with a grain of salt and with the knowledge that we still have many unknowns.
Sources: Pension Insurance Act (155/1995 Coll.), Act on the Organization and Implementation of Social Security (582/1991 Coll.), information calculation for reducing early pensions (ČSSZ), personal experience with pension calculations
Tags: Early retirement people care
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