Explanation: How exactly will the new auto-enrollment pension system work?

With automatic enrollment, an employer must enroll their employees for a pension if the employees do not already have a pension plan.

Employers would then be required to contribute a percentage of an employee’s salary to fund their retirement. The state would also participate in this system.

Haven’t I heard of this before?

You may have heard of it, as plans to introduce an auto-enrollment pension system have been talked about for 25 years.

Its implementation has been postponed several times, but now it looks like it will finally be ready by 2024.

why do we need it

Around one million employees in the country have no company or private pension scheme.

Another way of looking at it is that around 65 percent of workers in the private sector have no supplementary pension.

This means that when they retire they are dependent on the State Contributory Pension funded by our PRSI (Pay Related Social Insurance) payments.

Ever-increasing life expectancy and an aging population will put enormous pressure on the Social Security fund, which pays state pensions from PRSI contributions, in the coming years.

This is because fewer workers are expected to contribute to the Social Security Fund due to the aging workforce. And there will be increased costs to fund the healthcare costs of an elderly population.

The statutory pension is currently around €13,000 per year. But there are question marks about what level it will be at in the coming decades.

That is why there are repeated attempts to raise the retirement age from the current 66 years.

Oh, and Ireland is the only Western country that still doesn’t have automatic enrollment or a similar scheme to encourage retirement savings.

How will this new pension system work?

From 2024, workers who do not yet have a work or personal pension will be automatically registered for the new state system.

It applies to people between the ages of 23 and 60 and to people earning between 20,000 and 80,000 euros.

Similar to the SSIA (Special Saving Incentive Accounts) of the early 2000s, the state will encourage people to save in this system. The state pays €1 for every €3 the employee contributes.

Participation in the new program is voluntary. However, you must actively deregister from the pension plan if, for example, you have to save for house money. They are reinstated two years later.

So is there free money from the state?

Essentially yes.

But then there is also “free money” for pensioners in the form of tax breaks. But the concept of tax relief for pensions is difficult to grasp.

For this reason, the state is selling this new automatic registration system as similar to the SSIAs, which were a roaring success.

How much do I have to deposit?

The new system will be phased in over a period of 10 years.

This means that contributions will initially be low to give workers and employers time to adjust.

For the first three years, workers contribute 1.5 percent of their salary, which is doubled by their employer, and the state adds another 0.5 percent of the workers’ original contribution.

In years four through six, employees pay 3 percent, which in turn is supplemented by their employer, while the state pays an additional 1 percent into the pension system.

In years seven through nine, the percentage payments are 4.5 percent for employees and employers and 1.5 percent from the government.

After 10 years, employees and employers pay 6 percent and the state 2 percent.

What does that mean in euros for my pension?

Suppose you are 23 and earn €40,000. If you sign up for the program, you will make contributions totaling around €143,500.

These are supplemented by their employer throughout the life of the program.

The state contributes 48,000 euros.

According to government calculations, by the time the worker turns 66, he will have a pension pot worth around €660,000.

Who will be affected?

Around 750,000 people will sign up for the new program. Most of them are young.

Introducing the scheme, Social Protection Secretary Heather Humphreys said that “the young people who are tomorrow’s retirees deserve the same benefits as those who are retiring today”.

What did employers say?

Admirably, the small business lobby group, Isme, quickly came out of the blocks and welcomed the new system. This is despite the fact that the system will cost employers money.

Do I still get the statutory pension?

Yes. The introduction of the new system will not affect your State Pension entitlements. They are separate schemas.

When you retire, you will receive a full State Contributory Pension, provided you have made sufficient PRSI contributions.

But I already have a pension?

Then this new regulation does not apply to you.

If you have your own pension but your employer is not contributing to it, it may make sense to switch to the new automatic enrollment system when it is operational.

What does it mean for others not participating in the program?

There are costs that must be borne by all taxpayers.

The new system is estimated to cost around 2.8 billion euros in the first ten years of its existence.

Many feel this is a price worth paying to ensure the financial security of most workers.

What if my income exceeds €80,000? Will I be kicked out of the program?

No, you will not be kicked out of the program if your income exceeds €80,000.

Employer contributions and the state subsidy are limited to a maximum of EUR 80,000.

However, workers can still contribute to income above €80,000 if they choose to do so.

Are there any disadvantages?

The new system will be managed by a new central processing authority, housed within the Department of Social Protection.

This new agency will have agreements with private pension providers such as Irish Life, with a choice of four different investment funds.

Workers can choose a fund, and if they don’t, they’re put into a contingency fund.

There has been criticism that using private pension providers will mean high fees for them, as these companies are notorious for making it impossible to track the exact amount of fees they collect from pension savers.

Also, the fact that employers will have to recruit employees for the new system could lead some employers to increase incentives to force employees to work as subcontractors.

And the state contribution is not as generous as hoped.

The state pays €1 for every €3 workers pay into a new scheme

according to dr However, Laura Bambrick of the Irish Congress of Trade Unions has to pay €1 for every €2.50 to comply with the current 40 per cent tax break on retirement savings available to workers earning over €36,800.