Automatic Enrolment Retirement Savings Scheme

 The Government has published the Automatic Enrolment Retirement Savings System Bill 2024 which will now be brought before the Oireachtas to be enacted.  This is designed to address the issue of 65% of private sector workers who have no pension entitlements under either an occupational or personal pension arrangement, and who will be solely reliant on the State Pension when they retire.

The Government is establishing a State body, the National Automatic Enrolment Retirement Savings Authority, to administer the Scheme.  The Scheme will be operated similar to the Special Savings Incentive Accounts (SSIAs) which were in place during the years 2002 to 2007, where the Government will provide a top up amount, rather than the current practice whereby an employee obtains tax relief (20%/40%) on their contributions to a current occupational or personal pension arrangement.

Employers will be required to submit contributions to the Central Processing Authority which is being established.

The current details of the proposed scheme are as follows:

Commencement Date    January 2025 (to be confirmed)

Eligibility                             All employees who are not currently in an occupational pension scheme or personal pension scheme and

• are aged between 23 and 60
• earning over €20,000 per annum

will be auto enrolled into the scheme.

Opt Out Facility                Employees must stay in the system for 6 months but will be able to opt out during months 7 and 8.  The Employee will be refunded their own contributions since enrolment but all employer and State contributions to that date will remain in the employee’s retirement account.

Employees will also be able to opt out in months 7 and 8 following each contribution rate change.  A refund will only apply for the additional contributions they have made since the rate change.  All previous contributions including employer and State remain in the retirement account.

Employees will be able to suspend or pause their contributions at any time outside of the mandatory 6-month participation period.

Employers’ and State’s contributions cease once an employee opts out, suspends, or pauses their contributions.

Re-Enrolment Facility    Employees who have opted out or suspended their contributions and remain eligible for the scheme will be automatically re-enrolled after 2 years.

Investment Options         There will be three strategies to choose from i.e. Low, Medium or High Risk.

There is limited detail available, except that it has been suggested that each of these strategies will be invested equally across four investment managers.

Earnings Cap                       An earnings cap of €80,000 applies for calculation of contributions payable to the scheme.

Contributions                     Contribution rates are being phased in over the initial 10 years of the scheme as follows:

The Government contribution equates to an effective tax relief of 25%.

AVCs                                     These will not be allowable to the scheme.  It is only those employee contributions detailed above which will be payable to the scheme.

Tax Relief                           Employers’ contributions will be offset against Corporation Tax as currently applies.

Employees – no tax relief is available as the Government are making their top up contribution.

The long-term contribution rate of 6% of Gross Earnings which is deducted from net income (net of Income Tax, PRSI & USC deductions) is equivalent to deducting a contribution from pre-tax earnings of:

• 5% of Gross Earnings for a standard rate taxpayer
• 10% of Gross Earnings for a higher rate taxpayer

Returns                                Employers will be required to make a separate return to the Central Processing Authority.   The details of how this works will be communicated at a later date.

Benefits Payable              On Death

The value of the employee’s retirement fund will be paid to their estate.

On Retirement

Initially the employee will receive a lump sum payment.  However, it is mentioned that a range of retirement products will be made available as the scheme matures.  The retirement date will be linked to their State Pension Age.

Under the Bill:

• There will be no initial requirement for an employer’s occupational pension scheme to meet certain minimum standards in terms of contribution design but a “quality test” will apply in due course. The quality test will have to apply no later than from year 7 of the new scheme.
• In the interim, if an employee or their employer pays any contribution to an occupational pension scheme, a PRSA or a Retirement Annuity contract, they will not have to be enrolled in the Government AE Scheme.

There may be amendments to the Automatic Enrolment Retirement Savings System Bill 2024 as it passes through the Oireachtas, which affects the above.  In addition, further information is required on:

• Investment Options
• Charging Structure
• Retirement Options and in particular how a person with a mix of both traditional occupational scheme/personal pension entitlement and Auto Enrolment entitlement are administered in relation to their tax-free sum cash entitlements.

The Government has major challenges to overcome for the scheme to be fully operational by January 2025 such as:

• The establishment and staffing of:
  • National Automatic Enrolment Retirement Savings Authority
  • Central Processing Authority
• IT system being fully operational.
• Comprehensive communication exercise for both employers and employees.

With the legislation now being progressed and a signalled 1 January 2025 go live date it’s imperative that employers consider their Auto Enrollment strategy and employee readiness. Employers will need to consider whether they will utilise the Government Auto Enrolment scheme or whether they will promote their own occupational pension scheme for employees who are not currently in pensionable employment. They will also need to consider whether they need to make design changes to their own occupational pension scheme and consider the cost implications of the alternatives available.

Lifesteps Financial Planning Limited can assist employers assess Auto Enrolment versus private pension plans as well as consider longer-term implementation support including defining and delivering effective employee communications. Please contact us if you would like to discuss this further.