Regardless of what else Auto Enrolment (AE) achieves when it eventually becomes a reality, it has already succeeded in shining a spotlight on the pensions issue in Ireland and has generated unseen levels of interest in the topic with us in Donegal.
We have seen an increased number of enquiries from employers in Letterkenny and Donegal in general, wishing to set up a pension arrangement for their employees or to make improvements to their existing arrangements.
It is also evident in the recruitment market where employers we speak with are reporting a heightened focus on retirement benefits on the part of candidates of all ages.
Employers are also noting an impressive level of technical knowledge in relation to pensions on the part of candidates.
Auto Enrolment is aimed at addressing the needs of the vast swathe of the Irish workforce which currently has no occupational pension provision. According to government figures, there are approximately 750,000 workers over the age of 23 and earning at least €20,000 per annum* currently in that position.
At present, they face the prospect of their sole income in retirement being the State Pension (Contributory) of €13,795 per annum at the current maximum rate**.
AE will therefore represent a major step forward. But it must be borne in mind that it will not necessarily provide a solution for everyone and in many cases will offer benefits that are actually very different and may not suit those already enjoyed by members of workplace pension schemes.
Contribution levels to the Auto Enrolment System will start at an extremely low level and won’t reach the same levels as those of many workplace schemes for several years.
Auto Enrolment (AE) Uncertainties in Letterkenny, Donegal
There are many unknowns and uncertainties swirling around the auto-enrolment proposal at present.
Chief among them is the start date AE is due to launch in Q1 2024, but no exact date has been confirmed yet.
When it comes to tax relief there is a very clear difference. With a pension, an employee paying income tax at the 40% rate effectively receives tax relief at the marginal (highest) tax rate. However, if they become a member of the Auto Enrolment system the State will provide a top-up equivalent to 33% of the employee contribution*. In effect lower tax relief.
That equation changes in favour of the employee if they are paying tax at the standard rate of 20%, of course. Again, this highlights the potential utility of the new AE system for employees in lower-paid areas of the economy.
The enrolment process?
Anyone between the ages of 23 and 60, and who is earning over €20,000 a year, will automatically be enrolled into the pension scheme when they start a new job unless they have their own pension or access to an occupational pension.
Employees will be able to opt-out or suspend their contributions after six months if they want to. However, they will be re-enrolled after two years. Once re-enrolled they can again opt out after another six months if they want to – but the aim is clearly to get employees to remain enrolled.
The alternative is a Company Pension Scheme under a Master Trust.
Why Master Trust makes sense
A Master Trust is simply a defined contribution company pension scheme set up under trust. It differs from traditional Defined Contribution pension schemes in that multiple employers all coexist under the one trust deed, hence the term ‘master trust’.
Employers struggling with onerous new responsibilities in relation to their pension schemes brought about by the recent pension legislation changes have the option of moving their scheme into a Master Trust structure where all those obligations are looked after in a professional and cost-effective manner.
Companies can outsource all the governance and administrative obligations to the Master Trust.
A Master Trust is designed to comply with the enhanced member communication requirements contained in IORP II (Institutions for Occupational Retirement Provision) as well as with the new obligations in relation to investment strategies.
This is clearly very attractive for the many hundreds of mid and large-sized employers where the additional costs and governance requirements associated with IORP II compliance could detract from enhancing member benefits in the long run.
Employers in Donegal Need to Take Action
Employers need to pre-empt the arrival of auto-enrolment in 2024. Unless they establish some sort of Pension Arrangement which provides contributions and benefits at least equal to those required under AE, then the Employers will have no option but to ensure that their Employees are Auto enrolled in the government-proposed AE system.
Of course, there is also a large cohort of smaller firms operating in some sectors which do not currently have a pension scheme in place and probably have no intention of establishing one. The auto-enrolment system will certainly play an important role in boosting the retirement incomes of workers in those firms.
Example of savings through auto-enrolment:
For every €3 saved, the Government will put in €1, up to a limit. So, if a worker 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 the salary. This will start off at just 1.5% but gradually increase to 6% by year 10.
Source: Department of Social Protection (2022). The Design Principles for Ireland’s Auto Enrolment Retirement Savings System
Attracting and Retaining Employees
Employers need to consider their options carefully at this point. Employees and job candidates have become a lot more sophisticated in terms of their pensions knowledge and this is having an increasing influence on their choice of employer.
Companies that offer a defined contribution pension scheme with contribution levels designed to deliver an adequate pension in retirement will enjoy a distinct advantage in the talent market while also enjoying an enhanced employer brand.
They can achieve that with the Master Trust Pension Scheme which will offer active investment performance, governance expertise, and streamlined administration, all in a highly cost-effective package.
Source: *The Design Principles for Ireland’s Automatic Enrolment Retirement Savings System, Department of Social Protection, March 2022
Source: **State Pension (Contributory) (citizensinformation.ie
The information contained herein is based on Advice First’s understanding of current Revenue practice as of April 2023 and may change in the future.
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Auto Enrolment Letterkenny & Donegal FAQ's
What is auto-enrolment?
Auto-enrolment is a pension savings plan rolled out by the government. It aims to improve Irish workers’ retirement outcomes. Currently, there are over 750,000 workers in Ireland without pension savings. This means they may only have the State Pension, (currently €265 per week), to retire on – meaning a huge drop in their living standards when they retire.
Learn more via Advice First Financial on-site consultation or call us.
How does auto-enrolment work?
Through auto-enrolment, employers must contribute to a workers’ pension plan. Employees will have access to a workplace pension plan which is co-funded by their employer and the State. Workers who are not currently part of a pension plan, aged 23 years and older, and earn €20,000 or more per year will be automatically enrolled into the new workplace pension plan.
A key feature of the system is that although participation is voluntary, it operates on an ‘opt-out’ rather than an ‘opt-in’ basis. If after six months a worker wanted to opt out, they can but they will be re-enrolled again after two years. The aim is to encourage workers to recognise the importance of saving for retirement through a pension plan.
When is Auto Enrolment due to start?
The Government plans to introduce auto-enrolment in Ireland by the end of 2023 with the first payments going through the new system by 2024. It has been in the works for almost two decades and is closer to realisation than ever before.
What if I’m already part of a workplace/company pension plan?
If you are saving into a workplace/company pension plan, nothing will change for you when auto-enrolment comes into play. Previously, the onus was on employees to join a pension plan but with auto-enrolment, the onus will now move to employers to ensure they offer a workplace pension to all employees who are eligible to join.
A workplace/company pension is set up by an employer. Employees usually pay in a set portion of their salary, and this can be increased at any stage. Employers usually make contributions on behalf of their employees to top up their pension savings. This is an advantage that makes workplace/company pensions appealing, and employees also benefit from the generous tax relief available on employee contributions.
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.
Is everyone entitled to the State pension?
In a yes, there are 2 types of state pension, contribution and non-contributory which is means tested.
To qualify for the Contributory State pension, you must have started paying social insurance before reaching 56 years of age. You must have paid at least 520 full-rate social insurance contributions and have a yearly average of at least 48 paid and/or credited full-rate contributions from the year you started insurable employment until you reach 66 years of age. If you don’t have the above, then you must have a yearly average of at least 10 paid and/or credited full-rate contributions from the year you started insurable employment to the end of the contribution year before you reach the age of 66.
In order to help provide for your retirement, starting a pension is one of the smartest financial decisions you can make. When choosing a pension, having all the information you need is key.
Sound advice is invaluable, so it’s a good idea to seek advice from a financial advisor. Visit us in our Advice First Financial Office or give us a call. As a trusted financial advisor, we can guide you through the process and help you select the right pension plan for your circumstances.