Many people struggle to plan for retirement, and it can be difficult to know where to start. But with the introduction of auto-enrolment pension schemes, saving for your retirement has never been easier. In this blog post, we’ll explain what auto-enrolment pension schemes are, how they work, and why they’re so important. By the end of this post, you’ll have a better understanding of how you can secure your financial future and enjoy a comfortable retirement.
Auto-enrolment Pension Scheme in Ireland
The Government announced the new auto-enrolment pension scheme in Ireland earlier this week. It will come into effect in January 2024 for approximately 750,000 workers across the State.
Automatic enrolment will see employers introduce a new pension scheme in Ireland and automatically enrol their employees into the scheme.
The pension plan was implemented to encourage people to begin saving for retirement.
The people impacted by the auto-enrolment scheme?
The Government confirmed this week that there are approximately 750,000 people between 23 and 60 who are employed, earning more than €20,000 and not currently enrolled in a company pension scheme.
The Government will target 750,000 people through the auto-enrolment scheme to help bridge the pension gap.
This gap exists and will continue to grow because the state pension system will not be sustainable in the future due to the increasing life expectancy and ageing population.
How does the scheme work?
The scheme works by adding employee, employer, and state contributions to maximize savings. They expect employees to contribute 1.5% of their salary, increasing every 3 years by 1.5% until they eventually reach 6% by year 10.
In addition to the employer and employee contributions, the State will also add a top-up to the money paid into the pension pot.
For example, an employee could pay €3 to their pension. This means that employers must match that €3 and the State contribution will top it up by €1.
As the scheme is opt-out rather than opt-in, people without a company pension or supplementary pension (PRSA / Personal Pension) will not need to do anything to start paying into their pension fund.
Can I opt out of the scheme?
Yes, after 6 months of commencing contributions, employees will be able to opt out for up to 2 years.
After this, any money that you have saved in the auto-enrolment system during that six months may be returned to you, but contributions paid by both employers and the State will remain in the pension pot.
However, this is not an indefinite opt-out and employees will be automatically opted-in after two years.
The same procedure applies, where they will have to wait six months before they can opt back out again.
What is the pension contribution cap?
Employers will have to match employee contributions for up to 6% of salaries below €80,000. However, employees can contribute on earnings greater than €80,000 if they wish.
What happens if I already have a PRSA, can I run two pensions?
No. They expect you to park your PRSA and contribute to the auto-enrolment pension.
What happens if I change jobs?
People moving between jobs will not have to change pension schemes or join a new scheme.
They will remain members of the auto-enrolment scheme on a ‘pot-follows-the-member’ basis.
In addition, people with multiple employments will have their pension savings consolidated into one ‘pension pot’.
Can I draw down my pension early under the new plan?
In most circumstances, no, people will not be able to draw down their pension early through the new scheme.
Currently, the only circumstance where someone can draw down their pension through this proposed scheme before their retirement age is an extreme illness.
“There won’t be earlier drawdown than the retirement age for any other circumstances,” said Duggan.
According to Duggan, the specifics of pension drawdown through illness will be worked on when the legislation is drafted later this year.
In 2024, when the new scheme is set to be in place, the pension age will still be 66.
Can I contribute lump sums to the new scheme?
Currently, no. Humphreys said that the immediate plan is to get the scheme up and running before they look at allowing additional voluntary contributions. However, Humphreys said it is something that they can examine after the scheme is up and running.
Where are my savings going?
Employees who are enrolled in the new scheme will have four different retirement savings funds to choose from.
These funds will all have different risk/reward profiles, going from conservative, medium-risk to high-risk. There will also be one default fund based on what the Department calls a ‘life-cycle’ investment profile.
Anyone who does not choose a specific fund will be enrolled in the default fund.
Will the State pension remain in place?
Yes, Humphreys confirmed that the State pension will remain and will be the “bedrock” of the new auto-enrolment scheme.
Like any area of financial planning, I recommend that you take control now and look at your options now.
Currently, tax relief now if you’re on the higher rate is 40% on every contribution you make. The new system will see a 33% rate of relief so while better overall with an employer contribution, personal relief will reduce by 7%.
If you have any questions or queries on this, please don’t hesitate to contact us or read more on this topic here.
