Background

The previous legal framework set the minimum retirement age at 65 years, which also applied for partial retirement. Further to this, an employee would only be entitled to a retirement pension when he/she had contributed to the Social Security System for at least 15 years, 2 of which had to be included in the 15 years prior to his/her 65th birthday.

Should an employee retire after 65 and comply with the referred requisites, the base to calculate the corresponding pension was increased by 2% for every ‘extra’ year of contribution if he/she had already contributed for 35 years. Otherwise, such increase only applied when the employee finally met this latter requirement.

Employees over 65 who met the requirements necessary for ordinary retirement were entitled to a partial retirement pension. Moreover, employees over 60 who met the requirements necessary for ordinary retirement were also entitled to a partial retirement pension if the company simultaneously employed an unemployed individual or someone who was rendering services under a fixed term contract to substitute him/her.

New legislation

Law 40/2007 enacted on 4 December 2007, which entered into force on 1 of January 2008, established that employees who retire after the age of 65 and meet the requirements to obtain a retirement pension will automatically see their base calculation of the retirement pension increased by 2% per ‘extra’ year worked, even if they have not contributed to the Social Security System for more than 35 years, and by 3% if the employee has contributed to the Social Security System for at least 40 years on his/her 65th birthday.

Further to this, the new legislation provides that employees over 65 who meet the requirements necessary for ordinary retirement and are entitled to a partial retirement pension can only reduce their working time between 25% and 75%. With regards to employees over 60 who met the requirements necessary for ordinary retirement, the will following additional requirements will have to concur for him/her to obtain a partial retirement pension: (i) the employee has to have rendered services for the company for at least 6 years prior to the retirement date; (ii) the employee has to have contributed to the Social Security System for at least 30 years; and (iii) the substitute must occupy the same position as the partially retired employee or, if this is not possible, he/she must have a similar base of contribution.

What this means for you

This new legislation helps companies retain senior talents by increasing the scope of the economical benefits and, more restrictively, their amounts. However, since it also restricts partial retirement, in some cases it may cause difficulties when trying to refresh the staff.