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Pension Auto-Enrolment

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:

 

Phased Contributions

 

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:

 

State Contribution under Auto-Enrolment

 

 

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:

 

  1. 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.
  2. 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.
  3. 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.

 

Need some assistance?

Fill out your details and enquiry below, and one of our Qualified Financial Advisors will get back to you shortly.

 

Is it worth having a Pension?

 

We’ve often heard expressions along the lines of: “why save money for later” or “investing in pensions is gambling”. While these represent the thinking of a certain portion of the population it is important to understand that by putting a away a certain amount each month you can make your money work smarter, faster and go much further allowing you to live the life you want in retirement. In the following, we point out four reasons why you SHOULD bother with a pension…

 

1. Tax Relief on Pension Contributions

 

The state doesn’t want to be responsible for you when you’re going on month long cruises around the Mediterranean in retirement, therefore they allow any payments towards your pension plan to offset your income tax bill. The maximum percentage of your income you can claim relief on, depends upon your age (Click here for an illustration). And the contributions you make benefit from the THREE tax breaks:

 

  1. You can claim tax relief on contributions at your higher tax rate (20 or 40%).
  2. No tax on investments growth within you pension fund.
  3. When you want to retire you can then take 25% of your final sum tax free & up to 4% per annum thereafter to fund your income post retirement.

 

The closer you are to retirement age, the greater the percentage of your income you can contribute. If managed correctly you can fund, receive a retirement income and earn investment growth all tax free. This underpins the importance of receiving good advice when managing your pension!

 

2. Choose When To Retire!

 

Currently the qualifying age for the Irish state pension is 66 years old. This will inevitably increase with time due to the ageing Irish population & increases in longevity. If you do wish to retire earlier or would maybe just like to have the option to do so in the future, funding a private pension is the way forward. Maybe you would like to take a step back from work in your early sixties but keep your toes in your work for much longer. By funding a private pension and sticking to the plan, this can become a reality.

 

 

3. You need Income in Retirement

 

People often forget that your income is your most important asset! Pre-retirement, a decent portion of your disposable income (money left over each month after your fixed expenses) will likely be going towards the things you enjoy doing on the weekend, or a going for a quick trip across the pond every now and then. Then all of a sudden you realize you have more wrinkles than you ever remember having, you have left your employer for good, retirement has snuck up on you without having planned how and where you will receive the same level of income that has supported you throughout the many years. To plan for retirement you will need to know where your income will come from.

 

€248.30 per week or €12,911.60 per year is what the Irish government is giving to retirees in 2021 to do with as they please. If you were used to a much higher income & would like to still go out to your favourite fancy restaurant at the weekends (Covid Depending), you will need to have another source of retirement income. For most people, a private pension plan is the way how. Revenue limits on your pension income allows for up to 4% per year tax free to be drawn down which will help supplement your state pension.

This handy Pension Calculator will show you how much you need to start saving NOW to receive your preferred income in retirement.

 

Did someone say Retirement Plan? A good place to start planning is to look at your current monthly income (after tax) and ask yourself what ideal amount you would like to receive on a monthly basis in retirement to maintain your preferred lifestyle.

 

This handy Pension Calculator will show you how much you need to start saving NOW to receive your preferred income in retirement. Next, contact your Financial Advisor (right here if you don’t have one), simply discuss your current financial situation, and a solution that best suits your retirement goals and he or she will regularly check in with you to ensure that you are maintaining them.

 

4. We’re all living longer – Irish people especially!

 

Nowadays, people are leading more active lives in retirement. Living longer certainly sounds appealing as it gives us more time to accomplish our goals in life like visiting the places we’ve always wanted to and enjoying our everyday hobbies. Although positive, this also brings with it the challenge of having enough financial resources to see it through.

 

According to the 2019 Key Health trends published by the department of Health in Ireland, over the past decade we have added 3 months per year to our life expectancy with the overall mortality rate having reduce by 10.5% since 2009. This shoots Ireland above the EU average as living longer than our European neighbors. Life expectancy on average will now see men living to 78 and women to age 83. Long term care is an expensive business for the elderly, and so by planning now for sufficient income in retirement will ensure that you don’t have to be a financial burden on your family.

 

So where to from here?

Which pension option is best suited for me?

 

The earlier you start contributing to your Pension, the better off you will be in retirement! Most people find that paying into a pension is not the highest priority. And that makes total sense given that more important financial obligations come first such as mortgage or rent bills, insurance premiums, other loans to pay off, and not to mentioned putting food on the table at the end of the day.

 

However, after these mandatory expenses and if you have a few quid left over each month, consider regularly putting some away into your own private pension. You will thank yourself later in life! 

 

The best option for you depends on your personal circumstances.

If you need guidance on how prepare for the retirement YOU want, the best place to start is to seek advice from a Qualified Financial Advisor.

 

      Drop us a call here   

 

 

Need some assistance?

Fill out your details and enquiry below, and one of our Qualified Financial Advisors will get back to you shortly.

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