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Understanding the Pension Auto Enrolment Scheme

Background

Ireland is currently the only OECD country that does not have a mandatory pension scheme for employees. Finally, after over 20 years of discussion and consultation, legislation was last week introduced to the Dáil that will pave the way for a new retirement planning scheme – Pension Auto Enrolment Scheme – for over 800,000 employees.

When does it start?

The target launch date is officially late 2024 but at this point it is likely to be early 2025 when the new scheme will be up and running.

Who is the scheme for?

Any employee aged from 23-60 who is earning over €20,000 p.a. up to a maximum of €80,000 p.a. and is not an existing active member of a company pension scheme will be automatically enrolled in the new scheme.

Employees who are already contributing to a company pension scheme will not be included.

How much is contributed?

For every €3 saved, the Government will put in €1, up to a limit. So, if an employee were to save €100 a month, the Government will add another €33. On top of this, an employer will also have to gradually match any contributions made by up to 6% of salary. This will start off at just 1.5% but gradually increase to 6% by year 10.

Years Employee Contribution Employer Contribution Government Contribution
1-3 1.5% 1.5% 0.5%
4-6 3% 3% 1%
7-9 4.5% 4.5% 1.5%
10+ 6% 6% 2%

Source: Department of Social Protection (2022)

How does an employee join?

The mechanics of the scheme have yet to be confirmed but once it is launched it is likely that monthly pension contributions will be automatically collected from Employers and Employees just the same as your other salary deductions (e.g. PRSI, USC etc.). The contributions will appear on the employees payslip.

Does an employee have to join the scheme?

As the name suggests, employees are automatically included in the scheme but they have the option to opt out after the first month.

What does it mean for employers? 

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.

Employers who currently have pension schemes that restrict the eligibility to join the scheme they will have to decide to opt for the state’s auto-enrolment or adapt an existing plan. For those employers it is vital that they assess their options now ahead of these changes and adjust their budgets to meet the additional costs of employee remuneration.

For many businesses that means higher staff related costs but it should also be viewed as an investment in their people and will likely attract and retain good quality employees.

Summary & Observations

Any initiative that gets people saving for their retirement should be seen as a positive. In other countries where AE has been introduced, the “opt-out” rate is low as employees very quickly get used to the habit of saving for their retirement, which ultimately provides a savings pot of money that will help replace their income when they retire.

However, when compared to pension schemes in the private sector the proposed AE scheme is very much the poor relation.

There is little flexibility in terms of contribution levels, there is no ongoing investment or financial planning advice provided and the tax relief available through private pension schemes is significantly more generous for anyone paying the higher rate of tax.

Pension Auto Enrolment will definitely result in a change in culture in Ireland where people will be of the mindset that if they are in employment then they should always be saving for their retirement. However, this scheme is ideally suited for entry level employees and people on salaries taxed at the standard rate.

If you’d like to discuss Pension Auto Enrolment or your own pension arrangement just get in touch with Daragh at Coleman Financial Services on 01 5313711 or 086 385 9208 to arrange a suitable appointment.

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