Personal Finance

What is the auto-enrolment pension scheme?

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Daragh Cassidy
Head Writer

After years and years of delays and false starts the new auto-enrolment pension scheme is set to come into force in 2024.

Currently, around 750,000 workers in the State have no private pension

This means they’ll be wholly reliant on the State pension when they get older. 

However the full State pension is just over €250 a week, so this means many workers could see a major reduction in their living standards when they retire.

Despite this, many workers are slow to enrol in pension schemes. Sometimes it’s due to inertia or the fact that their employer may not offer its own pension scheme. 

To combat this, the Government is now making it mandatory for all employers to contribute towards a worker’s pension, which will be co-funded by the State, and for workers to be automatically signed up for a pension when they start work.

The new auto-enrolment pension scheme is to be up and running by 2024 after Social Protection Minister Heather Humphreys announced in October 2022 that the bill will finally be introduced to the Oireachtas in early 2023, with the scheme up and running the next year.

What are the payment rates?

For every €3 that you save into a pension, the Government will put in €1, up to a limit. 

So if you were to save €100 a month, the Government will add another €33.

On top of this, your employer will also gradually have to match any contributions you make up to 6% of your salary. This will start off at just 1.5% but gradually increase to 6% by year 10.   

In any year you can of course choose to save more - but your employer won’t be required to match it.

Years

Employee Contribution

Employer Contribution 

Government Contribution

1 - 3

1.5%

1.5%

0.5%

4 - 6

3%

3%

1%

7 - 9 

4.5%

4.5%

1.5%

10+

6%

6%

2%

Is there a cap on contributions?

Both an employer’s and the Government’s contributions are capped at €80,000 gross annual salary.

So for example for the first three years the maximum amount an employer will contribute is €1,200 a year and for the Government it’s €400 a year.

However, if you earn over €80,000 you can still contribute but your employer or the Government won't match your contributions on earnings in excess of this.

Explain the enrolment process? 

Anyone between the ages of 23 and 60, and who is earning over €20,000 a year, will automatically be enrolled into the pension scheme when they start a new job unless they have their own pension or access to an occupational pension.

You’ll be able to opt-out or suspend your contributions after six months if you want to. However, you'll be re-enrolled after two years. Once re-enrolled you can again opt out after another six months if you want to - but the aim is clearly to get employees to remain enrolled. 

What will happen to the State pension?

Nothing is changing to the State pension for now and it will remain the bedrock of people’s income when they retire.

An employee’s PRSI payments will continue to go towards their State pension.

The aim of the new auto-enrolment scheme is to provide employees who don’t already have a private pension with extra income in retirement.  

Where will my money be saved?

As with any pension plan, your money will be invested in a mixture of stocks, government bonds, commercial property and commodities through a so-called ‘managed fund’.

It’s expected that there will be four managed funds to choose from with various levels of risk/potential returns. 

How does this compare to occupational pension schemes?

If you have an occupational pension scheme (in other words a pension provided by your employer/company) your pension will work a bit differently.

Most company pension schemes also match an employee’s contributions up to a certain limit - 5% is average but it can be up to 10% in some cases. So potentially more generous.

Also, while the Government doesn’t contribute to the pension per se, you pay no income tax on any contributions that you make up to a certain limit.

If you pay tax at the top rate of 40%, this is the equivalent of the Government giving you back €40 back for every €100 that you save. So more generous than the 33% on offer with the auto-enrolment scheme.  

However, if you earn under €40,000 as a single person and therefore only pay tax at 20%, this is the equivalent of the Government giving you €20 back for every €100 that you save. So less generous. 

In other words, for most people, particularly those earning over €40,000 a year, it’ll be better to save into an occupational pension offered by their employer. 

However, the new auto-enrolment scheme is aimed at workers in lower-paid jobs where until now pension coverage has been lacking or non-existent.  

Does a scheme like this exist elsewhere?

Several countries have automatic pension schemes and they are viewed as a good way to get people saving for a pension early. 

Anyone who has travelled to Australia to work for the year might remember receiving "superannuation", which was a 9% contribution which employers had to pay towards every worker's pension.  

And in the UK a similar scheme was introduced in 2012 where it has been credited with hugely expanding pension coverage.

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