Auto-enrolment, scheduled for implementation in 2024, will introduce a State-run workplace pension plan for non-pensioned employees. This scheme is co-funded by both the employer and the State, offering a new retirement savings solution.
This blog post aims to simplify the complexities of auto-enrolment and pensions, offering a comprehensive guide tailored to the needs of employers and employees alike. Under this new retirement savings scheme, employees can only have one pension pot, meaning they must choose between auto-enrolment and a private pension; they cannot run both simultaneously. Whilst the final date is due to be announced early in 2024, it looks like the scheme will finally be enforced on companies in the latter end of the year. Auto-enrolments introduction in 2024 represents a significant shift in how retirement savings are approached, offering both challenges and opportunities for employers and employees alike.
Eligibility:
People who do not have a pension scheme, earn more than €20,000 per year and are aged between 23 and 60 will be automatically enrolled into the new system.
People outside of this range will not be automatically enrolled but will be able to opt in.
Employees already contributing to an occupational pension scheme, or an equivalent scheme, will not be automatically enrolled.
Options for Employers:
Employers are presented with two primary choices regarding auto-enrolment:
- Opting for the State’s AE Model: This involves facilitating the rollout of the government-mandated AE plan within the company.
- Adapting an Existing Plan or Initiating a Plan: Employers can choose to initiate a pension or modify their existing pension plans to become AE compliant, effectively creating their own AE model which is much more flexible.
Choosing the Right Option:
Several factors should influence an employer’s decision:
1. Tax Bracket: Higher earners may find a standard workplace pension plan more advantageous due to higher tax relief than the State’s AE model.
2. Flexibility: The ability to pay more or less than the mandatory amounts set by the State for AE.
3. Financial Advice: The State’s AE model, will not provide financial advice which is best practice and crucial in helping members to make informed decisions.
4. Early Retirement: There will not be any ability to draw your pension through the States Auto Enrolment model before the state pension age of 66.
5. Gender Parity: Women, who often experience career interruptions (e.g., maternity leave), may find standard pension plans more flexible for additional voluntary contributions.
How much will it cost?
For every €3 that an employee contributes, the employer must also contribute €3, while the State will contribute €1.
The contribution rates increase over a 10-year period, starting at 1.5% and capping at 6% of the employee’s net income.
What does it mean for employers?
For employers, Auto Enrolment implementation requires careful consideration. They must balance the financial implications with their employees’ needs, choosing between the State’s AE model and adapting existing pension plans. Employers face the challenge of managing additional costs, compliance, and providing support and advice to employees.
Most large employers in Ireland have existing pension plans in place, so may feel they will not be impacted by these changes. But often membership of these plans is voluntary, meaning that not all employees have become members of the plan.
Therefore, employers will need to decide whether to open their existing plans up to all employees to auto-enrol all non-members to their existing plan, or to instead allow for the auto-enrolment of non-members to the new state auto-enrolment system.
Smaller employers will also need to decide if they should enter the state auto-enrolment system, or obtain a flexible traditional occupational scheme which affords generous tax relief.
Conclusion:
Auto-enrolment is a progressive initiative aimed at improving retirement savings for employees but it very inflexible. Getting financial advice ahead of being Auto Enrolled is vital. Employers must carefully assess their options and consider their employees’ needs and financial situations when choosing between the State’s AE model and adapting existing plans. Employers will also have to be prepared to advise employees on how the scheme will operate, including details on eligibility, rates and increases.
The key message is to get ahead of these changes and prepare by speaking to a qualified financial advisor. If you are seeking more information on the implementation of Auto-enrolment (AE), and its impact on you as an employer or employee, contact Alpha Wealth Financial advisors play a crucial role in guiding businesses through this decision-making process. This expertise can provide valuable insights into how to effectively navigate the upcoming changes with Auto Enrolment.