In March this year the Minister of Social Protection Heather Humphreys TD announced a new pension scheme for 750,000 workers in Ireland who have only the State Pension – currently €253.30 per week – to look forward to when they retire. A State Pension that may not be there when they do retire. John Lowe of MoneyDoctors.ie reports.
There are over 680,000 citizens over the age of 66. By 2050 there will be three times this number (1.8million). For every pensioner retiring in 2021, there were five workers – in 2050 there will be two, hence the frantic search for a resolution to this growing issue.
The auto-enrolment idea is not new – they have been talking about this for nearly 25 years with employers not too happy to bring it aboard because of the cost, employees disinterested because they want to enjoy life now not in 30+ years and politicians ambivalent as all they want is your vote!
But finally it is here. Of course, there are rules and regulations:
- All employees not already in an occupational pension scheme, aged between 23 and 60 and earning over €20,000 across all of their employments, will be automatically enrolled.
- Under auto-enrolment, employees will have access to a workplace pension savings scheme which is co-funded by their employer and the State.
- With the system set up by 2023 for employee enrolments in 2024, the introduction of auto-enrolment will be very gradually phased in over a decade, with both employer and employee contributions starting at 1.5%, and increasing every three years by 1.5% until they eventually reach 6% by Year 10 (2034). This steady phasing allows time for both employers and employees to adjust to the new system. The scheme is voluntary for employees and they will have the option of opting out after six months but employers will not. They will automatically be re-enrolled every two years.
- Matching contributions will be made by employers to those contributions made by employees up to a maximum of €80,000 of earnings.
- The State will also top up contributions by €1 for every €3 saved by the employee, up to a maximum of €80,000 of earnings. This is in addition to the €3 that will also be contributed by the employer.
- This means that for every €3 saved by an employee, a further €4 will be contributed to their pension pot by their employer and the State – that is every €3 contribution by an employee automatically grows to €7 before it is invested, or, put another way for every €1 saved by an employee their savings account will be credited with €2.33. When fully established a worker earning €35,000 p.a. will accumulate a fund (excluding investment returns) of €293,000 over their working life.
- It is hoped these employer and State contributions will incentivise employees to stay in the Auto Enrolment system and reduce the cost to individuals of saving for retirement/
- The new system will account for about €21 billion in funds (excluding investment returns) after 10 years.
Ireland is the only OECD country that doesn't yet operate an auto-enrolment or similar system as a means of promoting pension savings. The new system is designed to simplify the pensions decision for workers and make it easier for employers to offer a workplace pension. The system will be voluntary but will operate on an 'opt-out; rather than an ‘opt-in’ basis.
- Eligible employees will be automatically enrolled/ ‘opted-in’ but will have the choice after six months participation to opt-out or suspend participation.
- Employees will have a range of four retirement savings funds to choose from.
- Three funds will have differing risk/return profiles. In addition, a default fund based on what is known as a ‘life-style’/’life-cycle’ investment profile will be provided.
- People who do not express a preference for any fund will be enrolled into the default fund e.g. the older the employee the more cautious the investment approach.
- Administrative costs and burdens are to be kept to an absolute minimum for both employers and employees through the establishment of a Central Processing Authority (CPA) to administer the system.
- Employers will not have to invest in the establishment or procurement of an occupational scheme for their own business. They will simply be required to facilitate payroll deductions.
- Importantly, people moving between jobs will not have to change pension scheme 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 ‘pensions-pot’.
- Services will be provided and supported through an easy-to-use online channel where participants will see their savings pots grow quickly and substantively.
There is legislation required to set up the system on a statutory footing, the Central Processing Authority to be established to operate the system, and a communications campaign to ensure people understand it. "It is an ambitious timeline, but one that is achievable" so says Minister Heather Humphreys.
So that is it, in a nutshell. To put it into perspective, if you are on an annual income of €40,000 and you are 35 years of age, by age 45, you will have 12% of your income (6% from you and 6% from your employer) plus the government’s contribution (2%), a total monthly investment of €466.67 per month.
If you choose to start your own pension (PRSA – personal retirement savings account – cheapest route to a pension) you could at age 35 invest 20% of your net relevant annual earnings on your own to a pension fund - €666.67 per month BUT the government will give you back by way of tax credits €266.67 per month (tax relief at 40%) or a net €400 per month. so that your fund is up 40% before any growth is achieved that year in your fund.
If your employer wishes to add 6% to it outside of the auto-enrolment scheme to your pension – €200 per month – then it is a win-win situation for you. Email me (email@example.com) for details or if your company want a webinar from me to explain.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ.