What is Pension Auto-Enrolment?
Pension Auto-Enrolment (AE) is a new savings and investment scheme for employees where financial returns are paid out to participants on retirement, in addition to the State Pension. It is being set up as not enough people have occupational or supplementary pension coverage to help maintain a reasonable standard of living in retirement above the level of the State Pension.
The proposed Irish Auto-enrolment system is designed to simplify the pensions decision for workers and make it easier for employers to offer a workplace pension. According to the Central Statistics Office’s Pension Coverage Survey 2021, the rate of supplementary pension coverage is around 66% of Ireland’s working population (outside of the State pension), and this could be as low as 35% in the private sector.
How will the Auto-Enrolment system work?
The auto-enrolment system is scheduled to go live from 1 January 2024, and will apply to approximately 750,000 employees who are aged between 23 and 60, earning over €20,000 across employments, and who are not already enrolled in an occupational pension scheme. Eligible employees will be automatically enrolled in the scheme but will have the choice after six months of participation to ‘opt-out’ or suspend participation. Those who opt out will be automatically re-enrolled after two years.
The Government as the new Central Processing Authority (CPA) will be responsible for, amongst other things, contribution collection, compliance, the allocation of pooled contributions to registered providers (RPs), the allocation of pooled investment returns to participants, and the overall administration of the auto-enrolment system.
How much will it cost?
The level of required auto-enrolment contributions will be gradually phased in over a decade. Contributions will be paid by employees, and matched by their employers with both employer and employee contributions starting at 1.5% of Gross Earnings and increasing every three years by 1.5% until they eventually reach 6% by Year 10 (2034). The State will top-up the rest. When allowance is made for the proposed Government top-up, this will lead to a total contribution being paid to a member’s pension account of 14% of Gross Earnings from 2034 (6% employee, 6% employer, 2% Government top-up).
The rates and time-frame are summarised as per below:
Employer contributions and the State top-up will be capped at a maximum €80,000 of an employee’s gross salary. Employees may contribute on earnings greater than €80,000 if they wish.
What the State Tax Incentive offers
Under the proposed auto-enrolment system the Government plans to operate a new incentive system to encourage pension savings by topping up member contributions. As outlined above the Government will contribute €1 for every €3 of member contributions.
Auto-enrolment will not replace tax relief available for private supplementary pensions. The Government has confirmed that the new system will run alongside the existing tax relief system available to pension savers participating in occupational pension schemes, PRSA and Personal pension products whereby individuals receive marginal income tax relief at either 20% or 40% (up to certain contribution limits) on their pension contributions.
The cost per €1 to member summarised below:
Investment Fund Options
The CPA will assign four commercial investment companies to become Registered Providers (RP’s) for the CPA. The role of the RP’s will be to provide investment options and act as investment managers for auto-enrolment contributions. They will invest contributions on behalf of individual participants and will be required to offer four fund types: 1. Conservative, 2. Moderate risk, 3. Higher risk, and 4. Default (The default option is required for people who do not nominate a preferred fund type and is a key element in a successful auto-enrolment system).
Should I wait for Auto-Enrolment?
Auto-enrolment is seen as a viable solution to address the lower pension coverage in Ireland, and could encourage people to be more financially aware of the importance of saving for their retirement. Although a positive move by government, there are many reasons why you should not wait for auto-enrolment and consider setting up a pension scheme for yourself and/or your employees now.
As outlined above, the auto-enrolment state tax incentives are less generous than the current tax relief incentives available for higher rate taxpayers.
Here’s why you should consider setting up your own Private Pension now:
- With a Private Pension, you can get up to 40% tax relief on your personal contributions now. For example, under existing rules if you contribute €1,000pm, and are on the higher rate of income tax, then you will receive tax relief of €400pm, meaning that your contributions of €1,000pm will only cost you €600pm. Under auto-enrolment the State will pay €1 to every €3 saved i.e. your contribution would be €667pm and the State’s contributions is €333pm. Please note that limits apply to the above.
- There is a wide range of excellent performing funds of different risk levels across the various pension providers, however, under the current auto-enrolment proposal, there is only a choice of 4 funds to choose from which can potentially limit your pension growth and flexibility.
- Auto-enrolment presents a risk that individuals will take a backseat and leave their contributions at the minimum contribution level which may not be adequate to sustain their current or desired lifestyle in retirement.
In order to secure your financial future, starting a pension is one of the smartest financial decisions you can make. When choosing a pension, having all the information you need is key.
Therefore, sound advice by a Qualified Financial Advisor is invaluable. Our Advisors can guide you through the process and help you select the right plan for your circumstances.
All of us have different goals for our retirement and this is why it would make sense to take personal control of your pension and retirement planning – to have access to all of the investment options available to you alongside a tailored strategy to help you get there.
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