BY JOHN ELLIS, FINANCIAL ADVISOR
There is a growing interest in the new auto-enrolment pension scheme with employers and employees requesting more information. Here are some of the common questions I have received recently.
Who is it for? Everyone from 23 to 60, and earning more than €20,000 a year, will automatically be auto enrolled when they start a new job.
Are there exceptions? Yes. You will be exempt if you already own a pension or are in an existing scheme.
When is it being rolled out? It is expected that the enrolment process will be up and running some time in 2024.
How does it work? 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. But there is a sliding scale initially with contributions based on an increasing percentage of salary over a 10-year period. When fully established, employees will be required to save 6% of their gross income in the Auto-enrolment pension system
Is there a salary Cap? The salary cap is €80,000 after which the employer and state do not have to contribute. This earnings threshold will be kept under review and adjusted if required every five years. Employees can decide over and above the set limits, but the employer won’t be required to match it.
Is there an opt-out Clause? Yes. you may suspend contributions after six months. You will then have a two-year hiatus but in year three you will be automatically re-enrolled again.
Should I leave my occupational pension scheme and enter the new scheme considering the government is going to contribute? Depends. The Government is already contributing to most pension plans through quite generous tax reliefs. Let’s assume your salary is such that you pay tax at the marginal rate of 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 you are paying tax at the standard rate 20% then it may be sensible to change as the Government contribution will be more generous.
Will the State pension be affected? Currently the old age pension will not be affected.
Who will oversee the new system? The new Central Processing Authority (CPA) will be responsible for overall administration of the system.
How will it work? The CPA will contract a small number of commercial ‘Auto-enrolment Registered Providers’ to offer a range of savings/investment products. Organise the collection of the employee and employer contributions and the State ‘top-up’. Organise the allocation of contributions to the preferred fund type of the members in line with their expressed preferences or on a default basis if no preference is expressed.
Ensure that employee/member instructions to opt-out or suspend savings are acted upon and arrange for fund accounting services to maintain a statement of individual accounts and allocate returns to individual accounts and arrange for administration services to members when they reach retirement age.
What if I change employment? The fund will be ‘portable’ ie. the pension will follow you to each employment. using a ‘pot-follows-member’ approach overseen by the CPA.
How should employers act now? With your financial advisor review your pension scheme arrangements and what if any contributions you and your employees are making to a pensions scheme or any PRSA. Read ‘The Design Principles for Ireland’s Automatic Enrolment Retirement Savings System’ brief at https://assets.gov.ie/219768/4aada71d-2731-4522-b218-9184a699652f.pdf
Last month in a speech to the Irish Association of Pensions Funds, Minister for Finance Michael McGrath sid: “I am pleased to say that implementation is well underway, with a project team in the Department of Social Protection progressing a range of elements. The General Scheme of the Bill has been published and the Joint Oireachtas Committee on Social Protection has been meeting key stakeholders over the last few weeks.”
Once the draft legislation has been issued (which is anticipated to happen later this year), employers will be in a better place to start planning.