Q I see the government’s new self-registration pension due to start in early 2024. I understand that under this plan, the contributions paid by employees will be matched by their employers and that the state will top up the money paid in on top of the pension pot. I’ve been paying into the company pension scheme for ten years – and my boss doesn’t pay any employer contributions there. Given that employer contributions would be paid under the automatic enrollment scheme, once automatic enrollment begins, would it be a better idea for me to leave my employment pension scheme and join the automatic enrollment scheme instead? Rose, Co Donegal
A The system of automatic enrollment is very welcome as about a third of workers currently have no additional retirement savings outside of the state pension. The final design of the automatic enrollment system is ongoing and it will be interesting to see how it will work alongside the company pension your current employer is promoting – particularly in terms of tax breaks, contribution levels and the investment options available.
As part of the planned automatic registration system, the state is offering a subsidy of €1 for every €3 the worker pays – equivalent to a 25 per cent tax break. (The government subsidy will continue to be paid up to a maximum of €80,000 of earnings.) Under the company pension plan you currently pay into, you will receive income tax relief on your pension contributions at the marginal rate of either 20 or 40. So the state auto-enrollment grant would be more beneficial than the tax break you currently get on your pension contributions into your employment pension scheme if you get an income tax break at the rate of 20 percent — but not if you get an income tax break at the rate of 40pc.
Under the proposed automatic enrollment scheme, initial combined employee and employer contribution rates will start in 2024 for an employee earning up to €80,000 at 3 percent of earnings – and rise to 12 percent in 2034. This rigid contribution structure, coupled with the Given that workers will not be able to pay additional contributions, the automatic enrollment system may become less flexible and unattractive from the perspective of a typical pension plan member.
You should continue to pay into your work pension and continue to review the position after full auto-enrollment details are in place.
My PRSA after retiring from work with a new job
Q I have a Personal Retirement Savings Account (PRSA) that I set up myself about ten years ago and have been saving for all this time. I’ve just started a new job – which has me joining a defined benefit pension scheme. Can I still deposit into my PRSA? Ian, Co. Wexford
A When you join a company-sponsored pension, you must stop making contributions to your current PRSA. In the future you may wish to make pension contributions in addition to your normal contributions to your occupational pension scheme. Such contributions are called Additional Voluntary Contributions (AVCs) and can either be paid into your own AVC-PRSA (if you cannot make AVCs through your employer’s pension scheme) or into your new employer’s AVC scheme (if your employer has an AVC scheme set up) to be paid in ).
While you currently have a PRSA, an AVC-PRSA is an entirely separate contract linked only to your own pension contributions from your new job. Your existing PRSA cannot be converted to an AVC-PRSA. If your employer has an AVC scheme, tax relief on your own contributions to that scheme can now be offset by your employer’s payslip – so unlike your current PRSA, you should not have to reclaim tax relief on your contributions yourself.
There are some key points to keep in mind regarding any PRSAs you have. First, you should review your PRSA annually. Your PRSA provider is required by law to send you a statement every six months. This allows you to check how the PRSA is performing and whether any investment shifts are needed.
You may have the option to port your current PRSA into your new employer’s AVC system (if they have one). There are pros and cons to transferring your PRSA, so it is important to seek independent financial advice before transferring.
Decisions to be made in the run-up to retirement
Q I plan to retire at 65 in two years. I have a pension that I’ve been saving for for the last 35 years – and some pensions that I’ve been saving for a few years early in my career. What decisions do I need to make regarding retirement planning as I approach retirement? Alan, Co. Louth
A There are a number of important areas to focus on as you approach retirement.
One is cash flow forecasting — where you forecast your income and expenses, as well as your assets, taxes, and liabilities over a lifetime. Consider seeking independent financial advice to get a realistic estimate of the amount of money you will need in retirement.
Another is investment planning – where you decide how to invest your current wealth and future savings based on your financial goals, risk appetite and current financial situation. Here, too, independent financial advice would make sense.
Also important is retirement planning, where you review your pension and make decisions based on your circumstances. In terms of specific decisions you need to make around your retirement, consider whether you’re maximizing your retirement contributions and, more importantly, consider where your retirement account is invested. Pension funds have been extremely volatile this year and you should make sure the fund you invest in is appropriate for someone who is two years away from retirement.
Another important area is tax planning, where you will develop a plan aimed at minimizing taxes to be paid in retirement while remaining compliant with all tax laws.
This also applies to estate planning – specifically how to maximize the value of your estate by reducing taxes and other expenses.
Welfare should also be considered as you need to weigh up front if you are on track to receive welfare if you qualify for it in retirement.
Finally, compile a list of your expenses – including everyday expenses (e.g. groceries and electricity) and one-off costs (e.g. insurance with annual payments and holidays). This will give you an idea of the expenses to prepare for as you approach retirement. Also consider whether you should put some money aside in case you need care in old age.
https://www.independent.ie/business/personal-finance/pensions/should-i-leave-my-work-pension-when-auto-enrolment-kicks-in-41697124.html Should I leave my work pension when automatic enrollment begins?