Will getting us autoenrolled in pensions stop us being grumpy old men and women?

The way our pensions are going, most people will end up grumpy old men and women in retirement.

Tha majority of pensions are underfunded with over half of private sector workers having no personal pension plan at all.

The Government's long term solution - apart from increasing the pension age - is 'auto-enrolment'. which will mop up those three quarters of a million workers with no pension by automatically enrolling them in a pension scheme.

Everyone aged between 23 and 60 earning more than €20k a year will be enrolled in a pension in their job under the proposal that is now scheduled for 2025, after several false starts.

After being auto-enrolled, you can always opt out after six months.

But employers will have to make a contribution to match yours – and the Government will also contribute, though much less, so there is a compelling reason to stay.

The minimum contribution for employers and employees will be 1.5% for three years.

This will increase gradually up to a maximum of 6% at the beginning of year 10. 

Some critics – trade unions and brokers - said that’s a bit of a slow burn if you’re in a hurry to build up your pension.

But the key point here is that this is an optional bonus for workers. They can take it,  leave it, or increase it.

When you do take it, your employer - and the State to a much lesser extent - must match your contributions up to the relevant level, which is a 'freebie' that didn’t exist before.

When you add on the bonus of tax relief, then you can get an awful lot of bang for your buck when you bump up your pension.

There’s nothing new about this. Many employers already bump up lucky employees’ pensions, sometimes by as much as 15%, never mind 6%.

But those employers are often high-falutin’ finance firms or multinationals – the crème de la crème of employers.

The new proposals will ensure that all employers have to row in, which will reduce the rampant pension inequality in this country.

 While it won’t totally defuse the “pensions timebomb” the mandatory scheme is long overdue and should be a good day for workers.

Here’s how it will work as per the Govenment's own website (https://www.gov.ie/en/publication/2c7b3-automatic-enrolment-retirement-savings-system-for-employees/):

What are the contribution rates?

The contribution rates for auto-enrolment will be phased in over the first 10 years of the operation of the scheme:

• employee contributions will start at 1.5% of gross pay

• in year four they will increase to 3%

• in year seven they will increase to 4.5%

• in year 10 they will increase to the maximum rate of 6%

	Employee	Employer	State
Year 1 to 3	1.5%	1.5%	0.5%
Year 4 to 6	3%	3%	1%
Year 7 to 9	4.5%	4.5%	1.5%
Year 10+	6%	6%	2%

Your employer will match your contributions. Instead of tax relief on your contributions, the State will provide a top-up contribution at a rate of €1 for every €3 you pay in. As the employee and employer contributions are matched equally and then topped up by the State, the total amount of contributions will amount to 14% of an employee’s gross earnings from year 10 onwards.

Contributions will be fixed at a set rate, and it will not be possible for you or your employer to pay more or less than this rate.

Contributions will be calculated on your gross earnings, so anything included in the gross pay field of a payroll file will be assessable. Contributions will not, however, be levied on any gross pay over €80,000.

An example, for someone earning €20,000 per year, the actual amounts are:

	Employee Yearly Contributions	Employer Yearly Contributions	State Yearly Contributions	Total Yearly Contributions
Year 1 to 3 (contribution rate at 1.5%)	€300	€300	€100	€700
Year 4 to 6 (contribution rate at 3%)	€600	€600	€200	€1400
Year 7 to 9 (contribution rate at 4.5%)	€900	€900	€300	€2100
Year 10 + (contribution rate at 6%)	€1200	€1200	€400	€2800

Your employer will pay the contributions at the same time as they pay you, and the contributions will be visible on your payslip.

If you are on unpaid leave (for example sick leave or maternity leave), contributions will not be deductible for the period of unpaid leave.

Why take out a pension?

Time

Pensions are a slow-burning long term investment. This means there’s time to even out the ups and downs of market fortunes.

Growth

It also means you benefit from the wonderful affect of compound growth.

Usually,pension investments do well over time. And Despite the market turmoil, Irish managed funds have managed a decent annual return.

Tax relief

40% tax relief on pensions make them an investment ‘no brainer’, although there are limits depending on your age.

How much can I put in my pension? 

Age % of Earnings

Under 30 15%

30-39 20%

40-49 25%

50-54 30%

55-59 35%

60 and over 40%

Employer contributions

Even better, when your employer matches your contributions, as they all will have to in three years’ time, you double your money again.

State contributions

The State is also set to top up your pension further as part of the auto enrolment scheme. 

Other things to consider

You have to pay tax when you take money out

Pension companies go nuts telling us about tax relief when you put money into your pension. They never mention that you have to pay tax when you take it out! But you can still get 25% of your pension pot ta, you may be paying tax at a lower rate in retirement, and pensioners can have a much higher tax exemption threshold.  

Charges

How do you think pension companies pay for all those ads telling us how great pensions are? By taking charges and fees from your pension fund. These can be onerous but the proposed mandatory pension scheme has reasonable charges capped at half a percent per year.

The Government can (and did) grab your money

When the Government urges us all to get a pension, it doesn’t mention that the big fat savings pot where we all save our pension money is an irrestible target when it needs money fast. Between 2014 and 2015 a pensions levy took out up to 0.75% of our total pension assets every year, which doesn’t sound than much but it was a massive hit.

Owning your house is your best pension

If you don’t own your own home, I think buying one deserves priority over your pension. Imagine retiring and having to pay rent in the current private market? That money you save on rent is also a tax free bonus and you can also trade down hour home in retirement if you need cash, tax-free.