What does the new auto-enrolment pension scheme mean for me? All you need to know..

THE GOVERNMENT’S NEW auto-enrolment pension scheme was approved earlier this morning and is set to come into effect in early 2024 for approximately 750,000 workers across the State. (Heard it all before i hear you say!)

The scheme has been in the works for several years and was initially planned to come into effect this year but was delayed due to the Covid-19 pandemic.

The scheme itself is being brought because of the pensions time bomb coming down the line due to not enough people having an occupational or supplementary pension for when they retire.

Who is impacted by the auto-enrolment scheme?

The Government confirmed this morning that there are approximately 750,000 people between 23 and 60 who are employed and not currently enrolled in an company pension scheme.

These 750,000 people are being targeted through the auto-enrolment scheme to ensure that they begin saving for their pension and that they are not left on just the State pension when they retire.

How does the scheme work?

The new plan will see contributions paid by employees being matched by their employers as a percentage of the employee’s gross income.

The State will also add a top-up to the money paid into the pension pot.

For example, an employee could pay in €3 to their pension. This means that employers must match that €3 and the State will top it up by €1.

The contribution rates are set to be phased in over a decade as follows:

As the scheme is opt-out rather than opt-in, people without a company pension or supplementary pension (PRSA / Personal Pension) will not need to do anything to start paying into their pension fund.

Can I opt-out of the scheme?

Yes, employees who do not want to pay into the scheme are able to opt out, but this cannot be done immediately.

According to Social Protection Minister Heather Humphreys, anyone who is accessing the scheme will have to wait six months after it starts until they are able to opt-out.

After this, any money that they have saved in that six months may be returned to them, but contributions paid by both employers and the State will remain in the pension pot.

However, this is not an indefinite opt-out and employees will be automatically opted-in after two years.

The same procedure applies, where they will have to wait six months before they can opt back out again.

Are contributions capped?

Both employer and State contributions are capped at a maximum of €80,000 of an employee’s gross annual salary.

However, employees can contribute on earnings greater than €80,000 if they wish.

Can I opt out if I am facing financial difficulty?

Yes, after six months of commencing contributions, employees will be able to opt-out for up to two years. However, at that point if they are still opting out, they will automatically be re-enrolled into the scheme. After another six months, employees can opt out again.

What happens if I already have a PRSA, can I run two pensions?

No. You would be expected to park your PRSA and contribute to the auto-enrolment pension.

What happens if I change job?

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 ‘pension pot’.

Can I drawdown my pension early under the new plan?

In most circumstances, no, people will not be able to drawdown their pension early through the new scheme.

Currently the only circumstance where someone can drawdown their pension through this proposed scheme before their retirement age is an extreme illness.

“There won’t be earlier drawdown than the retirement age for any other circumstances,” said Duggan.

According to Duggan, the specifics of pension drawdown through illness will be worked on when the legislation is drafted later this year.

In 2024, when the new scheme is set to be in place, the pension age will still be 66.

Can I contribute lump sums to the new pension scheme?

Currently, no. Humphreys said that the immediate plan is to get the scheme up and running before they look at allowing additional voluntary contributions.

However, Humphreys said it is something that they can examine after the scheme is up and running.

Where are my savings going?

Employees who are enrolled in the new scheme will have four different retirement savings funds to choose from.

These funds will all have different risk/reward profiles, going from conservative, medium-risk to high-risk. There will also be one default fund based on what the Department calls a ‘life-cycle’ investment profile.

Anyone who does not choose a specific fund will be enrolled in the default fund.

Will the State pension remain in place?

Yes, Humphreys confirmed that the State pension will remain and will be the “bedrock” of the new auto-enrolment scheme. (For how long – it’s being pushed out to 68 years of age and will continue to creep towards 70 and beyond in the decades ahead)

Like any area of financial planning, I recommend that you take control now and look at your options now. Currently, tax relief now if you’re on the higher rate is 40% on every contribution you make. The new system will see a 33% rate of relief so while better overall with an employer contribution, the personal relief will reduce by 7%.