The final Auto-Enrolment Scheme has not been confirmed nor put into law, but we have enough information to discuss how putting your own group scheme in place can not only provide you with control over very important variables, but also provide a better tax and investment regime for your staff.
The Irish Government has spent considerable time researching auto-enrolment (AE) best practices internationally to bring forward a scheme for Irish employees. The purpose of the scheme is to protect individuals without pension provision.
Central Statistics Office (CSO) figures show that 56% of employees have active pension cover (Pension Coverage Survey 2021). When the private sector is considered on its own, this figure drops to less than 35%.
As a result, many people see a drop in their living standards when they retire, especially when they only have the state pension to fall back on. It is generally agreed that the state pension should compliment personal retirement savings.
An estimated 750,000 people will be automatically enrolled to the new scheme:
- those with no occupational pension scheme
- aged 23-60
- earning €20,000+ p/y
- earnings capped at €80,000 p/y
- those outside the parameters can opt in
- self Employed Excluded
- ability to opt out after some time
The scheme will be managed by a new Central Processing Authority (CPA). Individuals will have access to a portal to view their contributions, values, and investment choice. There will be four investment options, one default strategy and three other funds varying in risk.
There is no advise available nor is there a proposed phone line. The mechanism for drawdown at retirement is yet to be defined, as well as the time period before someone can opt out. Several proposals are being considered:
- Lowering age limit to 16 years to align with PRSI minimum threshold.
- Removing income threshold of €20,000 to capture more vulnerable low earners/part time.
- 2-year lead in period following the bill passing to allow businesses to prepare.
- Maximum amount of all charges increased to allow for financial advice.
- Carefully consider tax relief in AE and how it impacts the wider pension system.
- Restricting investment to Ireland assets.
The tax relief proposed is different from current tax relief regimes. AE will see the state topping up contributions by 1/3rd of the contribution (depicted below) which equates to tax relief of 25%.
In the current tax regime, pension contributions for a higher taxpayer achieve 40% relief, and for a lower tax payer achieve 20% – i.e. you achieve tax relief at the rate of income tax you are paying.
So, if your staff falls into the higher rate tax bracket, they should contribute to a private pension rather than auto enrolment. For example, a single person in 2024 pays income tax at 40% on earnings over €42,000.
The contribution proposal looks like this:
The cost to your business under auto enrolment will therefore start at 1.5% of payroll in years 1-3, increasing 1.5% every three years until the threshold of 6% is reached. Pension contributions are considered a business expense and avoid employer PRSI of 11%, so it is a cost effective way of remunerating your staff.
If you put an occupational pension scheme in place for your staff in lieu of auto enrolment, it will provide you with some controls and additional benefits:
- Vesting period – the statutory right in Ireland is two years. Therefore if a staff member leaves your business prior to contributing to the scheme for two years you can retrieve the employer contributions from the scheme.
- Probation period – for now, you can still have a probation period for new joiners before they can join the pension scheme. It has not been defined if staff will have to be AE during probation, an if it is you can amend your scheme rules at that time.
o The UK has a grace period of up to 3 months for workers to be AE.
- Investment choice & administration– you can choose the company you want based on their investment track record, administration excellence and technology. By using the traditional occupational pension scheme model with financial advisor, your staff will have much more choice, access to an advisor and third party trusteeship. Overall the staff get a much better service and investment choice, by removing liability from your business.
o With the Central Processing Unit, if like the UK model, you as the employer will be responsible for learning and communicating the different variables of AE to your staff.
- Portability – the scheme can be moved to a new administrator or advisor should you deem necessary at any future point. Equally staff can move their pension if they leave service.
- Voluntary – for now, you could have a voluntary scheme where you don’t contribute unless the staff contributes. When the official AE rules are enforced you can make the contributions mandatory.
- Costs are higher with a private scheme, as you generally need an advisor to provide investment and tax advice. The life assurance company will also have a fund management charge which is taken by sacrificing units in the employees fund. This ranges from 0.5%-1.5% – the higher would be an employer that passes on the cost of the advisor to the staff and the lower end where the employer covers the cost separately.
o The charge proposed for the CPA on AE is 0.5% with no advice and limited fund choice.
Ultimately, Auto Enrolment cannot come into force until at least a year after the bill is passed in the Dail. The Taoiseach hopes to have the bill passed in early 2024 which means perhaps late 2025 we might see AE start. There was no mention in the Budget 2024 for costs relating to the Central Processing Unit which indicates that unit won’t be started or set up until 2025.
Setting up your scheme early allows you the freedom to have your own rules in place and more control. In particular, if your staff and executives are higher earners, the 40% tax regime available is much more attractive than 25%.
With nearly 20 years experience in the financial sector, Leah Pittam, Co-Managing Director and Founder of Progressive Financial, a Qualified Financial Advisor, Project Management Professional and currently undertaking her Certified Financial Planner designation. She is passionate about putting people in control of their finances and creating a clear and effective plan for the future. Her specialty is taking complicated concepts or products and making them easy to understand. She volunteers on the Board of Directors for Brokers Ireland, the industry body for Financial and Insurance Brokers. Leah has vast experience working with small and medium-sized enterprises. She is particularly passionate about ensuring executives manage their own finances well while also attracting and retaining talent to their business.
Joyce Rigby-Jones achieved the highest Companion status at the Chartered Institute of Personnel and Development (CIPD). She holds IMCA Certified Management Consultant certification and is actively involved in CIPD Ireland. With extensive senior HR experience in multinational corporations, Joyce specializes in aligning HR with business strategy and managing complex employee relations projects. She is also a Non-Executive Director of Nutgrove Enterprise Park, a not-for-profit organisation which provides enterprise space and support to growing and entrepreneurial businesses. Joyce started up Voltedge Management with her business partner Fredericka Sheppard in 2011, which has since become a leading HR Consultancy in Ireland.
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