The Irish Government have approved draft heads of new legislation to introduce a new occupational pension scheme to automatically enrol workers.
- Approx. 750,000 workers will be auto-enrolled with option to opt-out
- Starting at 1.5% of gross earnings raising to maximum of 6% over 10 years
- Matching employer contributions with a further State top-up
- For very €3 saved by a worker, a total of €7 will be invested (including employer and state contributions)
At present there are around 750,000 workers in Ireland earning over €20,000 a year who are not registered in a workplace pension scheme. A new auto-enrolment system announced by the Irish government, due to open for enrolments in 2024, means to address this.
Existing schemes such as PRSA / Group OPS systems tend to be aimed at higher paid sectors such as tech, financial services and pharmaceutical which offer up to 40% tax relief for employee contributions. The auto-enrolment scheme, which is planned to run alongside rather than replace these, is aimed at lower paid sectors such as tourism, hospitality and retail, which generally do not offer employee pension plans. The proposed new pension scheme will offer a state contribution equivalent to tax relief of 25%.
Under auto-enrolment, workers between the ages of 23 and 60 who are earning more than €20,000 a year and are not already in a workplace pension scheme will automatically be signed up to the scheme in 2024 when it is expected to be formally introduced. They will be able to “opt out” after six months but those who do will be automatically enrolled again two years later. The system aims to deliver a reasonable retirement income relative to an individual’s employment income and will incentivise workers to stay as a part of the scheme.
What the new Irish auto-enrolment pension scheme means for employers
- All employees between the ages of 23 and 60, earning more than €20,000 a year will now benefit from a workplace pension.
- Employers do not need to establish their own scheme.
- Employers will need to make sure their payroll process can handle deductions and remit both employee/employer contributions to the CPA.
- Employers are required to match employee contributions, starting from 1.5% of earnings and up to a maximum of 6% after 10 years and an earnings cap of €80,000.
- Employer deductions will be deductible against corporation tax.
- Failure of employers to implement and remit contributions will be dealt with through administrative penalty and can lead to criminal prosecution if ongoing.
What the new Irish auto-enrolment pension scheme means for employees
- Eligibility: All workers who are between 23 and 60 and earn over €20,000 per annum will be eligible for the scheme which will include an employer contribution as well as a state top-up.
- Those outside the age and earnings bands will be able to opt-in if desired.
- Value of contribution: Initial contributions will be 1.5% of gross earnings and will rise three times over a 10 year period to a maximum of 6%.
- Employers will match employee contributions up to an income threshold of €80,000 and the State top-up will provide an extra €1 for every €3 saved by the employee. In other words for very €3 contributed by an employee, a further €4 will be contributed to the pot between the employer and the State, making it €7 before investment.
- Those outside the age and earnings bands will be able to opt-in if desired.
- Opt-out vs opt-in: Employees will be able to opt-out at the end of a minimum term (7th– 8th membership month) and at each contribution increase, they will also be able to suspend contributions at any time.
- Choice of fund by risk: Employees will be able to choose from 4 retirement savings funds, ranging from conservative, moderate and higher risk, as well as a default fund which will be used if no other fund if chosen.
- Contributions to each type of fund will be pooled and distributed between 4 different commercial providers which will be chosen through open tender.
- Accessing and Managing Funds: Draw-down will be linked to state pension age and depending on pension tax law at the time of retirement will be available as a lump sum, annuity or approved retirement product.
- Employees can see real-time information, their savings as they grow and manage their account via an online portal.
- Changing Jobs: Employees changing employer will not need to leave and rejoin a new scheme. They remain enrolled in the scheme in a ‘pot-follows-member’ approach. People with multiple jobs will have their pension contributions consolidated.
- Admin Costs: A Central Processing Authority (CPA) is being established to administer the scheme and keep costs to a minimum both for employers and employees, which is estimated at a maximum of 0.5% of assets.
For assistance and support in managing Irish payrolls and pensions as well as the implication of this new scheme, we are here to help.
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