We are all living longer and for most of us retirement is a time to start ticking items off the bucket list, but how are we going to fund that lifestyle when so few workers in Ireland have a pension plan?
Enter the Government’s proposal for an auto-enrolment pension scheme which will be voluntary, and workers will have the ability to opt-out if they wish. The scheme includes matching employer contributions and a State top-up so when it is introduced in 2024 for every €3 saved by a worker a further €4 will be credited to their pension savings account.
Ireland is the only OECD country that doesn’t yet operate an auto-enrolment or similar system as a means of promoting pension savings. But with such a small contribution to start off with and the scheme still a good 18 months off, what can individuals do today to provide for tomorrow?
Joe Creegan, head of corporate life and pensions at Zurich Life Assurance, says the Government has plan for the scheme to be implemented on March 29th, 2024, and it will encourage 750,000 workers to start a pension. “There are only 35 per cent of private sector workers currently included in a scheme. With auto-enrolment by 2033 an employer will pay 6 per cent, the employee pays 6 per cent and government will pay an extra 2 per cent. But it will take 11 years to get to that 14 per cent – in 2024 it starts out at 1.5 per cent for employers and employees and a government subsidy of 0.5 per cent.”
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Therefore, he points out that someone who is 30 in 2024 will be 41 before they are making adequate contributions.
“The scheme applies to anyone earning over €20,000, between the ages 23 and 60, and it’s up to a maximum of €80,000 salary, so it will cover the majority of people. But there will be a cohort that won’t be able to join. There is also no opportunity to make contributions above this or for early retirement,” he adds.
So, what should individuals do now in order to have a safe and secure nest egg in retirement?
“Bank deposits have increased over Covid. I know there is a cost-of-living challenge, but a lot of people are saving. Investing in short-term deposit funds generates no returns so people should be considering diverting some of that cash into a long-term saving product that gives tax relief,” says Creegan. “There is a wider range of investments to choose from that generate a higher return, all be it with some risks.
“The other challenge here is that entry level contributions will never be enough. Employers have an obligation to make contributions from an employee’s salary, they’re not obligated to make contributions themselves but to make the reductions for anyone who wants to set up one in a tax efficient way through their salary. Employers are looking to attract and retain staff and to reward loyalty so they should be looking at pensions as a way to do this. I believe they should get ahead of auto-enrolment and set up a plan at this stage because at some stage it will be compulsory anyway,” Creegan adds.
Save more tomorrow is a concept that could work, he adds.
“Maybe people are under pressure right now so they could divert some future salary into pension – for example, if they get a 5 per cent pay increase, keep 2.5 per cent and put 2.5 per cent into a pension so you don’t see a hit in salary.”
Meanwhile, the mooted introduction of a 30 per cent tax rate which would cover income from €36,800 to €46,800 could also have a negative impact on pension contributions. If people are on a 40 per cent tax rate they make a similar pension contribution; if their tax is reduced to 30 per cent then their pension contribution would also be reduced. This is at a time when the Government wants to encourage employees to pay more into pension schemes.
Shane O’Farrell of Irish Life says workers should talk to their employers today and see what options are available to them.
“Even if they don’t contribute they’re obliged to allow it, making it more convenient for their employees. Talk to a good financial adviser too. Tax relief and starting early means you can build up a decent fund. Any fear around pensions is a fear of the unknown.
“A good plan will have a default fund designed for the average member, they won’t have to make complicated fund choices, trustees are probably making those decisions for the employee with a mix of assets. There will be some volatility day to day but they generally do very well over the long term. For people who aren’t employees, talk to an accountant as the situation can be more complex. Overall, we think auto-enrolment is a very good thing, it’s the right thing to do,” he says.
“While the scheduled initiation of auto-enrolment in 2024 is broadly welcomed, the current ratio of employee, employer and government contributions is skewed unfavourably against employers,” adds Dublin Chamber senior public affairs executive Órla Mannion.
“Before rolling out this scheme Government should consider a more equitable breakdown of contributions, instead of continuing to ask businesses to shoulder the brunt of upcoming labour legislation and the associated costs.”