The Implications of Auto-Enrolment for Business Owners

As business owners, it is crucial to understand the upcoming implementation of auto-enrolment and its potential implications. This article aims to shed light on the upcoming pension scheme proposal, which seeks to encourage greater private sector pension contributions. With only about 35% of private sector employees currently saving for retirement, the government aims to raise this number to 70% and beyond.

Understanding the significance of adequate retirement savings is of utmost importance.

Auto-Enrolment Explained:

Auto-enrolment is a plan set to be rolled out by the end of 2024, targeting employees aged between 23 and 60 who earn €20,000 or more across all employments and are not currently contributing to an existing employer pension scheme. Under this scheme, eligible employees will be automatically enrolled, simplifying the process of saving for retirement.

Proposed Contribution Structure:

According to the proposed scheme, which is 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 contribute 1.5%, while the state adds an additional 0.5%.

Implications for Higher Tax Rate Earners:

One significant aspect of the auto-enrolment scheme is that the state contribution serves as a 33% boost to the employee’s contribution, rather than the traditional income tax relief. This change can have notable implications for higher tax rate earners, potentially resulting in a loss of tax relief compared to an occupational pension scheme.

Projected Contribution Increase:

The contribution requirements under the auto-enrolment scheme 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, along with an additional 2% from the state. Importantly, these contributions will only apply to earnings up to €80,000. Earners in the higher tax rate bracket may experience a significant loss of tax relief under auto-enrolment compared to an occupational pension scheme.

Expert Opinions and Suggestions:

• Limited Investment Funds and Lack of Advice: One drawback of the proposed auto-enrolment scheme is the restricted selection of investment funds and the absence of advisory services for employees. Having options and guidance for investing in the future is essential. Thus, setting up your own pension scheme grants the freedom to choose the investment provider and advising brokerage. It allows flexibility in changing providers when necessary, fostering healthy competition and better outcomes for both employers and employees.

• Restricted Early Access: Unlike an occupational pension scheme that allows early access upon leaving service, auto-enrolment restricts early access to pensions until normal retirement age. Flexibility is key, and the ability to access pension funds earlier can be vital for some individuals.

• Seek Guidance and Establish an Occupational Pension Scheme: Our recommendation 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. Personalising your pension offering enhances employee engagement, demonstrates commitment to their well-being, and provides strategic advantages in administration, investment choice, cost management, compliance, and attracting and retaining top-notch talent.

While we appreciate the government’s efforts to increase pension funding through auto-enrolment, it is important to recognise that it may not be a perfect solution. Taking proactive steps to establish your own pension scheme offers benefits such as administration control, investment choice, cost management, compliance, and attracting and retaining talented individuals. We understand that auto-enrolment can be overwhelming, and our team of expert pension advisors is here to help you navigate this change and understand its impact on your business.

Don’t hesitate to reach out to us for more information.

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Source – Gov.ie & Zurich.ie