The Government has announced that the long-awaited Auto-Enrolment Retirement Savings scheme is set to be rolled-out from 2024. It is targeted at approximately 750,000 workers across the country. The aim is to ensure these people have made provision for their retirement if they do not have an occupational or other pension scheme in place.
We have a lot of details on the proposed way the scheme will work but like anything there will be post-implementation issues to iron out. Anne O’Doherty, Head of Life & Pensions gives us an overview of the scheme and what we believe it means for your retirement planning.
What is Auto-Enrolment?
Quite simply it is a new system to try to encourage people to make adequate provision for their income at retirement. It will work by having employers automatically enrol their employees into a workplace pension scheme.
Who is it aimed at?
It is aimed at those people who currently are not in a company pension scheme. The Government has estimated this number to be around 750k between the ages of 23 and 60 (earning more than €20,000).
How does it work?
The scheme is being set up so that contributions paid by employees will be matched by their employers. This will be as a percentage of the employee’s gross income. The State will then also add a top-up to the money in the pension pot. The contribution rates are going to be phased in over a 10-year period. They will start at 1.5% for both employee and employer in 2024.
Can I opt out?
The scheme is opt-out rather than opt-in. This means that people who do not have another arrangement in place will not have to do anything to start paying into their pension fund.
But employees who do not want to pay into the scheme can opt-out but only after an initial 6-month period. The opt-out is also not indefinite and they will be automatically opted-in again after 2 years.
Will there still be a state pension?
Yes, it has been confirmed that there will still be a state pension scheme in place. But as we know this does not function as a direct replacement for a salary. There is a short-fall – the “pension gap” which may well continue to increase due to increasing life expectancy and demographics. The idea is to bridge this gap, by auto-enrolling those that do not have an additional pension plan (company/personal/PRSA) in place into the scheme.
Our view
While we have all been eagerly awaiting a Pension Auto-enrolment scheme for many years, we do greet this with some reservations. These include the impact on small and medium businesses in terms of cost as well as administration. For employees, contribution levels will take years to get to meaningful levels. The personal tax rate on contributions is mooted to be lower than currently.
It may well be at least another decade before we can comment on whether the scheme is meeting the mark in terms of its objectives. For now, we would caution anyone who is thinking of their retirement planning not to delay. The earlier you start planning for the years ahead the better.
If you need any guidance on planning for your retirement, just get in touch.
7 April 2022