Auto-Enrolment Pensions in Ireland Update
The introduction of auto-enrolment pensions in Ireland has been a long-awaited development, with the goal of increasing retirement savings and reducing reliance on the state pension. While the initial launch was expected in 2024, there have been recent updates that push the official start date to January 2025.
Here’s a breakdown of the current state of auto-enrolment pensions in Ireland:
Delayed Launch: The latest information from the Department of Social Protection indicates a launch in January 2025. This delay allows for further system development and ensures a smoother rollout.
Administration: A new public body, the National Automatic Enrolment Retirement Savings Authority, will be responsible for administering the scheme, with oversight from the Pensions Authority.
Who will be automatically enrolled?
Employees aged between 23 and 60.
Earning more than €20,000 annually.
If you are not currently enrolled in a workplace pension scheme.
If you fall within the above criteria, you can expect to be automatically enrolled in a pension scheme in early 2025. You’ll have the opportunity to opt out or adjust your contribution level after six months.
How will contributions work?
Your contributions are based on a fixed percentage of your annual salary. Your employer will match this contribution, and the government adds an additional amount. You cannot contribute more or less than the predetermined rate.
Both you and your employer will contribute 1.5% of your annual salary in the first year, gradually increasing to 6% by year 10. The table below details the contribution rates for you, your employer, and the government:
Example:
The table below includes an example of a worker earning €20,000 a year:
What is the maximum auto-enrolment contribution?
For every €3 you contribute to your pension, your employer adds another €3 and the government adds €1. This means that for every €3 you contribute, €7 will be added to your account.
There’s a limit on how much your employer and the government contribute: this is based on a maximum annual salary of €80,000. So, in the first 3 years, the most your employer can contribute is €1,200 annually (1.5% of €80,000), and the government adds a maximum of €400 per year (0.5% of €80,000).
Even if you earn more than €80,000, you can still contribute to your pension. However, additional contributions above this salary threshold won’t receive matching funds from your employer or the government.
Will auto-enrolment be tax-advantageous for employees?
There is a key difference regarding tax relief offered between the state top-up (auto-enroment) and that of occupational pension schemes. In Occupational Pension Schemes or PRSAs, the tax relief matches your highest tax bracket. So, if you are paying 40% tax on your income, you will get a 40% tax relief on your contributions. However, joining the auto-enrollment (AE) system gets you a 33% state top-up on your contribution, regardless of your tax rate, making it less advantageous if you are a higher earner.
This makes the AE system potentially more beneficial for lower-income earners who pay the standard 20% tax rate. It’s also important to note that currently, the AE system doesn’t allow for additional voluntary contributions (AVCs).
How should employers prepare for auto-enrolment?
In anticipation of auto-enrolment (AE) and pending final legislation, employers should take steps to prepare. This likely involves reviewing employment contracts and pension schemes. Additionally, employers who don’t currently auto-enrol employees will need to adjust their payroll systems to handle either increased contributions to their existing scheme or contributions to the AE scheme.
- Payroll Review: Discuss with your payroll team the necessary adjustments for AE, including automatic deductions for enrolled employees, budgeting, and factoring in the contribution costs associated with your chosen system.
- Pension & Contract Review: Consider modifying your existing pension plan and employment contracts to comply with AE requirements.
- Evaluate Suitability: Assess whether the AE system aligns with your employee needs or if an existing occupational pension scheme is a better fit.
Where to from here:
Auto-enrolment (AE) arrives in 2025, impacting both employers and employees. While it boosts retirement income for workers in firms without pension plans, it also presents administrative and financial challenges.
To get ahead of these challenges, we recommend employers consider setting up their own occupational pension scheme before AE rolls out. This allows you to tailor the plan to your specific needs, potentially gaining advantages in terms of:
- Efficiency: Streamlined administration and compliance.
- Flexibility: Investment options and contribution adjustments.
- Cost Management: Control over fees and potential savings.
For more information on AE or setting up your own pension scheme, contact us to discuss your options.
E.&O.E.
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