Pensions play a vital role in helping individuals secure their financial future, especially in retirement. While personal contributions are essential, the role of employers in providing pension schemes should not be overlooked. In this post, we will explore the benefits of employer pension contributions and why they are crucial for employees and employers.
Increased Retirement Savings
Employer pension contributions serve as an additional source of funding for employees’ retirement savings. By contributing to an employee’s pension plan, employers help employees build a more substantial retirement fund over time. This extra boost can make a significant difference in the overall amount employees can accumulate before they reach retirement age, providing them with a more stable and comfortable financial future.
Tax treatment of employer pension contributions
One significant advantage of employer pension contributions is the tax benefits they offer to both employers and employees. In Ireland, employer contributions to pension schemes are tax-deductible for corporation tax relief, helping to reduce the overall tax liability for the employer.
For employees, any employer contributions made to their pension are not considered part of their taxable income, effectively reducing their tax obligations. These tax advantages make employer contributions an attractive option for both parties!
Let’s look at an illustration below…
Marie is age 45.
Annual salary: €45,000
Pension tax relief (based on age and earnings): 25%
Maximum allowable annual contribution: €11,250
If you are enrolled in an employee pension scheme, the contributions made by your employer to your pension are not deemed taxable as a Benefit-in-Kind (BIK), which essentially means that you are not taxed on the contribution that your employer makes on your behalf.
For instance, based on the details above, Marie has the option to contribute up to 25% of her salary towards her pension. Currently, she contributes 10% of her salary each month, and her employer also contributes 10%.
Marie and her Employer’s Pension Contributions
Due to Marie’s pension tax relief, at the higher marginal rate of 40% tax, her total contributions of €9,000 will only cost her €2,700 Net.
Marie contributes an AVC of 15%
In addition to these regular contributions, Marie has the ability to make an Additional Voluntary Contribution (AVC) once a year, equivalent to 15% of her salary. By doing so, she can maximize the tax relief benefits available to her. As a result, the combined contributions from both Marie (25%) and her employer (10%) could reach 35% of her gross salary annually.
By making an Additional Voluntary Contribution (AVC), Marie can maximize her contributions to avail of pension tax relief. She can contribute up to €15,750 annually with a combination of personal contributions, employer contributions, and AVC’s, while only costing her €6,750.
Employer Contributions to a PRSA
If you are a business owner or company director, you can also consider the updated Personal Retirement Savings Account (PRSA) funding opportunities that you may not be aware of.
As of 2023, a new change to pensions legislation resulted in a significant opportunity for company directors and business owners to fund larger pension pots than before. Since then, an employer contribution to a PRSA for an employee, is also no longer taxable as a Benefit-In-Kind (BIK) for that employee.
In essence, this change now allows an employer to contribute to a PRSA with no upper limit on employer contributions. In fact, the only limit is the lifetime Pension Fund limit which is currently €2,000,000. This rule change will be of significant interest for business owners and directors, as it means that they can now move profits from their business into a PRSA for themselves, for employed family members, and for employees.
Should I wait for Auto Enrolment Pensions?
It is now looking increasingly likely that the government will be rolling out Pension Auto Enrolment in 2025. Here, they will make it mandatory for all employers to contribute towards a worker’s pension, which will be co-funded by the State, and workers/employees will be automatically signed up for a pension when they start work.
Who will be Auto Enrolled?
Anyone between the ages of 23 and 60, and who is earning over €20,000 a year, will automatically be enrolled into the pension scheme when they start a new job unless they have their own pension or access to an occupational pension.
How will Auto Enrolment affect employer and employee contributions?
Employer’s contributions will be capped at €80,000 gross annual salary. So for example, for the first three years in the scheme, the maximum amount the employer and employee will each be able to contribute per year to the pension will be 1.5% of salary (€1,200 each). The government will also contribute an additional 0.5% (€400) per year to the scheme. However, if you earn over €80,000 you can still contribute but your employer or the Government won’t match your contributions on earnings in excess of this.
Will Auto Enrolment benefit higher-earners?
Referring to the above case study with Marie, Auto Enrolment will have fewer incentives for higher-income earners from a contribution limit perspective, as most employer (occupational) pension schemes will be able to match an employee’s contributions up to a certain limit—5% is average, but it can be up to 10% in some cases. Not to mention that if you contribute to a PRSA, you have the potential for an even higher scope for employer contributions for an employee or Company Director! So, more generous.
Auto Enrolment will also be less generous from a tax perspective. If you pay tax at the top rate of 40%, this is the equivalent of the Government giving you back €400 back for every €1000 that you save, whereas, the Auto Enrolment scheme will only offer 33% tax relief. So you will get more bang for your buck if you are a single person earning over €42,000 p.a and you pay tax at the higher marginal rate of 40%.
On the other hand, if you earn under €42,000 as a single person, you therefore only pay tax at 20%, this is the equivalent of the government giving you €200 back for every €1000 that you save. So, the Auto Enrolment scheme will be more generous for lower-income earners (33% tax relief available).
Auto Enrolment Summary:
Higher-income earners: Better to save into an occupational pension offered by your employer.
Lower-income earners: Better to go with the Auto Enrolment scheme.
Employee Attraction, Retention, and Engagement
Employee Retention and Attraction
Offering a competitive pension scheme with employer contributions for your staff can significantly improve employee retention and attraction. In today’s job market, employees value benefits that go beyond salary, and a robust pension plan with employer contributions is highly valued. If you are an employer and offer your employees a pension plan, they will be more likely to stay with your company as they will feel valued. Additionally, pension benefits can help attract talented individuals who are seeking opportunities with companies that prioritize employee well-being.
Improved Employee Engagement
An employer pension plan can also improve employee engagement. When employees feel that you are invested in their financial future, they are more likely to be motivated and engaged in their work. A sense of security and confidence in their retirement savings can alleviate financial stress and allow employees to focus on their current responsibilities. As a result, as an employer, you may find increased productivity, higher job satisfaction, and a positive work environment.
What are my options?
1. Employer pension:
- If your company gives you the opportunity to join their pension scheme, it is advisable to contribute to the scheme as this is a fantastic way to build up your retirement savings in tax-efficient manner. If you want to know how much you and your employer contribute to the plan, get these details from your employer. It’s a good idea to find out if you can take advantage of AVCs to increase your contributions and enjoy the associated tax benefits.
- If you are an employer, you have various employer pension options available to you, such as an Executive pension, Master Trust pension, or PRSA. You will need to carefully assess these options as they are not a one-size-fits-all. These will depend on your requirements as a business owner, especially if you are considering your own retirement provision needs.
2. Private pension:
- If your workplace doesn’t offer an employer pension plan, you can set up your own PRSA (Personal Retirement Savings Account) and make your own contributions through your payroll. Your employer is obliged to give you access to at least one Standard PRSA. You will also receive PRSA tax relief at source on your contribution through your payroll.
Where to from here:
Employer pension contributions have numerous benefits for both employers and employees. They increase retirement savings, provide tax advantages, aid in employee well-being, and enhance an employer’s reputation. If you are an employer and are thinking about the best pension options for you and your staff, our Financial Advisors have an array of pension contribution and funding options available to you.
If you’re an employee, you may have questions or need help reviewing your company pension scheme. You may also be looking at other funding options such as AVC’s. You may be in a job where there is no company pension scheme at all. Our Financial Advisors can assess your situation and advise on the best options available for you.
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