Auto enrolment considerations for employers
For employers, the NAERSA will be a critical point of contact, providing guidance on their responsibilities and ensuring that the enrolment process is as straightforward as possible.
Auto-enrolment is a major development on the horizon for Irish employers. With the government's plan to introduce this new pension scheme, it’s vital that businesses of all sizes understand what it entails, why it is being introduced, and how they can best prepare for the upcoming changes. As your financial adviser, we want to guide you through some of the key questions, ensuring you’re equipped with the right information to make sensible decisions about this important development for your company and your employees.
What is Auto-Enrolment?
Auto-enrolment is a new national retirement savings system set to become mandatory for many employers in Ireland. Under this system, workers who do not have access to a workplace pension scheme will automatically be enrolled in a national retirement savings plan. Both employers and employees will make contributions, with the government also making an additional contribution to help boost savings.
The key idea behind auto-enrolment is to make pension savings easier and more accessible for employees, particularly those who are currently under-prepared for retirement. Auto-enrolment simplifies the process by automatically enrolling workers into a pension scheme, with the option for them to opt-out under certain conditions if they choose not to participate.
Why is Auto-Enrolment being introduced
It’s being introduced to address a significant issue in Ireland: the pension coverage gap. Studies have shown that only about 35% of private sector workers in Ireland are covered by workplace pensions, which means a significant number of employees are not setting aside savings for retirement. Many others are not saving adequately for retirement, and there is concern that a large proportion of future retirees could face financial challenges in their later years.
The government’s primary goal with auto-enrolment is to improve retirement outcomes for Irish workers. It encourages people to begin saving for retirement earlier and more consistently. By automatically enrolling eligible workers into a pension plan, the policy overcomes inertia, one of the main barriers to pension savings. Many people delay or avoid signing up for pensions, often because the process seems complicated, or they underestimate the importance of long-term saving for retirement. Auto-enrolment removes these barriers by making pension participation the default option.
What are the main features of Auto-Enrolment?
Automatic enrolment for eligible workers: Employees between the ages of 23 and 60 who earn over €20,000 annually and do not currently have access to a workplace pension will be automatically enrolled in the scheme.
Set contribution levels: Employers will be required to contribute a percentage of their employees’ gross earnings to the pension scheme. Employees will also contribute a matching percentage from their wages. Also, the government incentive will amount to 1/3rd of an employee’s contribution, which equates to tax relief of 25%. The initial contribution amount will be 1.5% of salary by the employer and also the employee, rising to 6% from each over a 10 year period.
Opt out options: Employees will have a window to opt out of the scheme after a 6-month period and a number of other points in the future. However, they will be automatically re-enrolled in the scheme after a two year period outside of the scheme.
Choice of funds: Employees will have a choice of funds to invest in, with a default fund option available for those who prefer not to make an active choice. The government aims to provide a range of low-cost, high-quality investment options to ensure that retirement savings grow effectively over time.
When will Auto-Enrolment be introduced
Finally there appears to be some clarity... At the end of September, the Minister for Social Protection announced that auto-enrolment would commence on 30th September 2025. This allows a period of one year for the scheme to be established, investment fund managers appointed and the necessary communication campaigns to happen. There's a lot of work to be done.
The cynics amongst us might point out that there have been commencement dates announced previously, that have passed us by. With a general election definitely happening during this period and with whatever that might bring, I probably wouldn't bet the house just yet on that commencement date being achieved...
Who is overseeing Auto-Enrolment?
The oversight and administration of the auto-enrolment system will fall under a newly established body called the National Automatic Enrolment Retirement Savings Authority (NAERSA). This body will be responsible for managing the enrolment of employees, collecting contributions, and facilitating the investment of funds. They will also handle communication with employers and employees, provide educational resources, and ensure compliance with the scheme.
For employers, the NAERSA will be a critical point of contact, providing guidance on their responsibilities and ensuring that the enrolment process is as straightforward as possible.
There is a significant amount of work for this body to undertake to be ready for auto-enrolment, both in terms of establishing the scheme and also in engaging with all employers in Ireland.
What should employers do to prepare for Auto-Enrolment?
Remember first of all that we're all over this! It may be very beneficial to contact us to discuss what might be best for you and your employees. While we won’t play a role in auto-enrolment, there are a number of areas for you to consider, where our thoughts may be helpful.
How Auto-Enrolment will interact with your current pension arrangements: Just as one example, does your current scheme include all employees aged between 23 and 60 who earn over €20,000 p.a.? If not, you will likely need to include these people in your scheme or run the auto-enrolment scheme alongside your current scheme.
Higher earners who are not in your current scheme: Under existing pension rules, marginal rate taxpayers get tax relief at 40% on pension contributions. They will be substantially worse off under auto-enrolment, where the government incentive equates to tax relief at a rate of 25%. How will you approach this?
Update payroll systems: Auto-enrolment will require ongoing contributions from both employers and employees. You’ll need to ensure your payroll system can handle these deductions and that you can integrate seamlessly with the NAERSA’s systems.
Educate your employees: While auto-enrolment aims to simplify pension savings, it’s essential to educate your employees about the benefits of the scheme, their contribution levels, and their right to opt out. By providing clear communication at the right time, you can help employees make informed decisions about their retirement savings.
Stay informed: The auto-enrolment system is still being developed, and there will likely be updates and changes in the coming months. Stay informed about the latest developments and guidance from the government to ensure your business remains compliant and ready for the new system.
While the introduction of auto-enrolment may seem daunting, it is ultimately a positive step towards improving retirement outcomes for workers across the country. By engaging with this early, you can prepare your business for this new environment and help your employees secure their financial future.
The great new wealth extraction opportunity for business owners
the previously unattractive PRSA has now become a fantastic wealth extraction vehicle for business owners of profitable companies
Apart from the volatility in investment markets and everything else going on in the economy and the world in general, 2022 was also a tumultuous year in the world of pensions for business owners.
This is where it gets a little technical, but if you are a business owner of a profitable business, it is well worth sticking with us here as there is an opportunity you need to be aware of. Otherwise, give us a call and we will discuss it further with you.
In July 2022 there was a major upheaval in the pensions world, when due to regulatory developments, all the main providers ceased to offer one-man schemes, commonly known as Executive Pension Plans. While schemes set up prior to April 2021 were unaffected, any schemes set up since then or in the future would have to comply with significant new regulatory requirements that were introduced under an EU Directive known as IORP II. It was simply not viable for providers to offer a product to meet these new requirements.
The market was thrown into a state of flux, with business owners wishing to establish new pension schemes being unable to make tax-efficient large company contributions.
However the Finance Act 2022 came into law at the end of last year, which opened up a significant and very attractive opportunity for business owners, particularly of profitable businesses. The change relates to Personal Retirement Savings Accounts (PRSAs), which up until the beginning of 2023 treated employer contributions as a Benefit-in-Kind for an employee from an income tax perspective. This is now no longer the case, with employer contributions to a PRSA not treated as a Benefit-in-Kind in the hands of the employee. This gives the employee full personal benefit of their tax relief limits, without having to allow for any employer contributions made.
But furthermore, and unlike company pension plans, the big opportunity in the new regulations is they do not define the level of employer contribution allowable with reference to age, service, salary or other pension benefits. The only factor that limits employer contributions to a PRSA is the lifetime Standard Fund Threshold (SFT) of €2million. This makes PRSAs extremely attractive now for business owners when compared to occupational pension schemes or master trusts, where employer contributions continue to be limited by salary, service and age factors.
Also, tax relief on all employer PRSA contributions can be claimed in the accounting period in which they are paid. This is unlike a special contribution to an occupational pension, where the tax relief must be spread forward over 5 years.
The Opportunity
The new opportunity is for owners of profitable businesses, who can now extract large sums of money from their business by making large-scale contributions to a PRSA, with the only restriction being to avoid funding past the SFT. Also, if your spouse and/or your children are working in the business, the company can also fund pensions for them up to the SFT. That is a significant wealth extraction opportunity.
In addition, it’s worth noting that PRSAs differ to company pension plans when taking your benefits. First of all, you can get access to your benefits from age 50. Also with a PRSA, you can phase in your retirement by dividing your pension funds across multiple PRSAs. This option is unavailable when retiring from an occupational pension scheme.
So the previously unattractive PRSA has now become a fantastic wealth extraction vehicle for business owners of profitable companies. However as with all matters pension related, specialist advice and careful planning are needed. We would be delighted to help you.