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Basic economics shows that with an ageing population and the State Pension paid for by taxes, a dwindling workforce and an increasingly 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.

The Government has announced an auto-enrolment pension scheme solution will be in place in Ireland from 2024. This has been considered for almost 20-years and may well have been implemented already if it wasn’t for the Covid-19 pandemic. This announcement is seen by the Government as a vital step towards bridging the ever-growing pension gap. It has the potential to expand pension coverage to an additional 750,000 who are not currently in a pension scheme and will help improve Irish workers’ retirement incomes. 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 pension scheme.

In the early years, employers and employees will each be required to contribute 1.5% of 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 up and will offer a contribution of €1 for every €3 paid into the pension by the employee, so for every €100 saved the Government will add €33. It should be highlighted that if the employee is paying the higher rate of tax (currently 40%), then it will still 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 have suggested they plan to delay joining or setting up a pension until this is in place and although Auto-Enrolment is a lot better than no pension at all, I would not recommend delaying your pension savings. The Government has 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 5 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 alternatives for employees and business owners to secure their financial future and save tax via company pensions and Personal Retirement Savings Account (PRSA) structures.

Robert Downes QFA RPA is a Qualified Financial Advisor and Retirement Planning Advisor. You can contact him through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on robert@jfl.ie.