Proposed Auto Enrolment into Pensions

12 April 2022

Basic economics shows that with the aging population and due to the fact that the State Pension is paid for by taxes, the dwindling workforce and increasing older population means that the Irish Government at some point will no longer be able to support people in their retirement, leaving an uncertain future for many of us.

On 29th March the government announced auto-enrolment will be in place in Ireland from 2024. This has been on the cards for quite some time and would be in place already if it wasn’t for the Covid-19 pandemic. This announcement is seen by the Government as a vital step toward bridging the ever-growing pension gap and has the potential to expand pension coverage to an additional 750,000 who are not currently in a pension scheme. While much of the detail has yet to be finalised, what we do know is outlined below.

The system is to be set up by 2023 and employee enrolments into the scheme will begin in 2024. All employees aged between 23 and 60, earning over €20,000 a year and who are not already in an occupational pension scheme, will be automatically enrolled. While participation in the scheme will be voluntary, workers will have to “opt-out” of the scheme rather than opt-in. It is hoped that this model will encourage workers to remain in the scheme.

In the early years, employers and employees will each be required to contribute 1.5% of their salary, rising to 6% by 2034. The contributions will be capped to a salary of €80,000.

The state will provide an SSIA style top and will offer a contribution of €1 for every €3 paid into the pension by the employee which is equivalent to tax relief at 25%. It should be highlighted that if the employee is paying the higher rate of tax (currently 40%), then it may be more beneficial to direct their pension contributions to a private pension fund.

The investment choice for the auto-enrolment scheme will be kept very simple with a choice of four investment funds of differing risk-reward profiles, including a default “life-cycle” fund which will gradually reduce the level of risk as you approach retirement age. The fund managers have yet to be chosen but it is expected that the costs will be capped at 0.5% per annum.

Some clients recently have suggested delaying joining/setting up a pension until this is in place and while Auto-Enrolment is a lot better than no pension at all, we would definitely not recommend delaying starting a pension. The government have stated that the current tax breaks available for pension contributions are unlikely to change and private pensions will still operate in tandem to the auto-enrolment scheme.

This phased approach is designed to ease the financial impact of the changes, but will still be a significant new cost to many employers who are already suffering with the current inflationary environment. It is worth noting that when a similar scheme was announced in the UK in 2012, it was only companies with 250 or more staff that were required to join.Smaller employers were added five years later.

Ultimately, it’s great the government has finally pressed ahead with getting auto-enrolment set up and many people stand to benefit.

However, there is a lot of work to be done in terms of figuring out the finer details, engaging workers, and building the infrastructure to have it ready to accept payments in January 2024.

In the meantime, there are better alternatives for employees and business owners to secure their financial future and save tax via company pensions.

Jacinta Clerkin BSc QFA FLIA RPA is a Qualified Financial Advisor, Fellow of the Life Insurance Association and Retirement Planning Advisor. You can contact her through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on jacinta@jfl.ie.

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