Understanding Auto Enrolment and What it Means for Business Owners
This article talks about something that’s on the horizon for all of us: auto-enrolment.
You know that pension scheme proposal that’s been buzzing around? We think it’s important for business owners like you to understand the implications it may have.
So, what exactly is auto-enrolment?
Well, it’s a plan to encourage more people in the private sector to contribute to their pensions. Right now, only about 35% of workers in that sector are actively saving for their retirement. The government is aiming to raise that number to 70% and even higher. And we all know how important it is to have enough money set aside for the future.
However, as cool as the idea of increased pension funding sounds, the terms of this impending auto-enrolment scheme may not be ideal for everyone, especially when compared to an employer-selected occupational pension scheme.
Let us explain.
The auto-enrolment scheme is set to roll out by the end of 2024 and will target employees aged between 23 and 60, who earn €20,000 or more across all employments, and who aren’t already contributing to an existing employer pension scheme. The interesting thing is that eligible employees will automatically be enrolled, making it easier for them to save for retirement.
Under the proposed scheme, which is still subject to specific draft legislation, both employers and employees will contribute matching amounts.
In the first year, the suggested contribution rate is 3.5% of the employee’s salary. This means the employer and employee each put in 1.5%, while the state adds an additional 0.5%.
Now here’s where things get interesting. With auto-enrolment, the state contribution serves as a 33% boost to the employee’s contribution instead of the usual income tax relief. This little change can have big implications, especially for those earning at a higher tax rate. They might end up losing out on some much-needed tax relief when compared to an occupational pension scheme.
The auto-enrolment scheme’s contribution requirements are expected to increase every three years over a phased-in period. Within ten years, the total contribution is projected to reach 14%, with employers and employees contributing 6% each, and the state chipping in an additional 2%. It’s important to note that these contributions will only apply to earnings up to €80,000. Earners at the higher rate of tax will end up with a significant loss of tax relief under enrolment when compared to an occupational pension scheme.
Now, we know this might all seem a bit overwhelming, but don’t you worry! We’re here to help break it down for you.
Here are our expert opinions on the matter:
Firstly, one drawback of the proposed auto-enrolment scheme is the limited selection of investment funds and the lack of advice provided to employees. We believe it’s important for you to have options and guidance when it comes to investing for your future. That’s why setting up your own pension scheme allows you to choose the investment provider and the advising brokerage. You’ll have the flexibility to change providers if needed, and it promotes healthy competition and better outcomes for you and your employees.
Another limitation of auto-enrolment is that it restricts early access to pensions until normal retirement age. In contrast, an occupational pension scheme allows early access upon leaving service, potentially as early as age 50. We think flexibility is key, and having the ability to access your hard-earned pension earlier can be a game-changer for some.
Our advice is to seek guidance on establishing your own occupational pension scheme before auto-enrolment becomes mandatory. By doing so, you can avoid the need to invest in a mandated arrangement. Plus, you’ll have the advantage of customising your pension offering, enhancing employee engagement, and demonstrating your commitment to their well-being.
While we applaud the government’s efforts to boost pension funding through auto-enrolment, it’s not a perfect solution. We believe that those who proactively establish their own pension scheme will enjoy strategic advantages in administration, investment choice, cost management, compliance, and attracting and retaining top-notch talent.
If all this auto-enrolment stuff has your head spinning or if you simply want more information, we’re here for you!
Our team of expert pension advisors will help you understand how this pending change may affect your business. Don’t hesitate to reach out to us!
Source- Gov.ie & Zurich.ie