BY JOHN ELLIS, FINANCIAL ADVISOR
Are you one of the 750,000 workers in Ireland that have yet to make some pension provision? If so you will be dependent on a State pension just over €260 a week when you retire. Unfortunately, if the State pension is going to be your only means of income you will see a huge reduction in your standard of living.
From experience many people are reluctant to start a pension. I have heard all manner of seemingly valid reasons and excuses, and that is what they are, excuses: my business will be my pension, I won’t see 65, can’t afford it, one fella said as he took a long drag on his cigarette. I’m too young or I’ll start when I hit my 40s 50s etc and then the ultimate excuse of “sure it’s too late now to start”.
The Government is now planning to ‘help you’ by making it mandatory for you and your employer to contribute towards your pension, and will in turn enhance the plan. Eventually when you start a new job or join the workforce for the first time you will be automatically enrolled in to a pension. It is expected that the enrolment process will be up and running some time in 2024.
For every €3 that you save into the pension, the Government will add €1, within certain parameters. If you were to save €100 a month, the Government will add another €33. Contributions will be based on a percentage of salary, ranging in years one to three that will see 1.5% for employee and employer and 0.5% government contribution up to year 10 onwards a max of 6% each with Government contribution of 2%.
There is salary cap of €80,000 after which the employer and State do not have to contribute. Employees can decide over and above the set limits, but the employer won’t be required to match it and most importantly your old age pension will not be affected.Everyone from 23 to 60, and earning more than €20,000 a year, will automatically be auto enrolled when the y start a new job unless they have their own pension or are entered into an employer’s scheme.
Some people want the freedom to decide their own fate in life and will resent the State interfering in their life, financial or otherwise. If that is the case there will be an opt-out clause — the ability to suspend contributions after six months. You will then have a two-year hiatus but in year three you will be automatically re-enrolled again. Again, if you wish, you can opt out. But, as with the inertia to start, the Government is assuming that once you start you will continue.
A common question being asked is should I leave my occupational pension scheme and enter the new scheme considering the Government is going to contribute? In fact, the Government is already contributing to the vast majority of pension plans through quite generous tax reliefs.
You will need your financial advisor to advice you here but let’s assume your salary is such that you pay tax at the marginal rate ie. 40%. This means the Government is already giving you back €40 on every €100 you save. So, if you switched you would only get €33 on every €100 invested. But if your salary is such that you are on the standard rate 20% then it may be sensible to change as the government contribution will be more generous.
The scheme is being rolled out to “encourage those in lower-paid jobs because in this cohort the pension coverage is very small or non-existent”. However, some in the Government are saying that a 2024 start date is “somewhat ambitious”. So its looks as if the scheme could be further delayed.
We wait to see.