24th October 2024
The Sligo Weekender | Financial Advice
Are you Auto-Enrolment Ready?
As the introduction of Ireland’s auto-enrolment pension scheme approaches, both employers and employees must prepare for the changes ahead.
Starting on September 30, 2025, the scheme, named “My Future Fund”, will automatically enrol around 800,000 workers aged 23-60 who earn over €20,000 annually and, do not already have a workplace pension. This initiative aims to supplement the State pension, providing greater financial security in retirement, but it
also brings new responsibilities for businesses and workers alike.
Auto-enrolment is designed to ensure that more employees are saving for retirement. Employees will contribute a set percentage of their salary to a pension scheme, which will be matched by their employer, and the government will add a topup
contribution. This provides workers with an additional income source to supplement the State pension, currently €277 per week, which they will begin receiving at age 66.
Employers must participate in the scheme, meaning that from September 2025, they will need to contribute to a pension plan for all eligible employees who do not have an existing pension. While employees can opt out of the scheme after six months, they will
be re-enrolled every two years, with the option to opt out again.
Contributions to the scheme will come from the employee, the employer, and the government. Initially, both employees and employers will each contribute 1.5% of
the employee’s gross salary, increasing gradually to 6% over a 10-year period. The government will start by contributing 0.5%, rising to 2%. Contributions are capped
at €80,000 of gross annual salary, and employees cannot contribute more than this threshold.
The contribution rates for auto-enrolment will be phased in over the first 10 years of the operation of the scheme: employee contributions will start at 1.5% of gross pay; in
year four they will increase to 3%; in year seven they will increase to 4.5%; in year 10 they will increase to the maximum rate of 6%
Employers must ensure their payroll, finance, and HR systems are equipped to handle the new requirements.
This includes notifying eligible employees, processing contributions, and staying updated with any legislative changes to remain compliant. The penalties for non-compliance could be significant, including financial fines and
potential prosecution. It is crucial for employers to start preparing well in advance of the 2025 deadline to avoid these risks.
The introduction of auto-enrolment means that many workers who might not havecontributed to a pension will now have a financial safety net for their retirement. For lower-income workers in particular, this scheme could provide essential support in
their later years.
However, there are concerns about whether the scheme will provide enough benefits. Unlike traditional pensions, auto-enrolment follows a more rigid structure, and
employees will not be able to contribute beyond the capped amount. Additionally, the tax implications when drawing down their pension must be considered. If your business already has a pension plan in place, you are in a strong position.
Employees who are actively contributing to an existing scheme will not be automatically enrolled in the new system.
This simplifies compliance and shows your employees that you are supporting their financial futures helping you to retain talent.
One area where there has been limited clarity is how auto-enrolment benefits will be taxed when employees retire.
The government has announced that 25% of the pension fund can be drawn tax-free, while the remaining 75% will be taxed. The details are still being finalised, but it is expected to align closely with existing pension tax rules.
Employees will benefit from the government top-up during their working years, but they need to plan for tax implications when they begin withdrawing from their
pensions. The government also suggests that additional retirement options, such as annuities, may be developed. With auto-enrolment less than a year away, businesses can get ahead by the following detailed below.
Reviewing current pension schemes: Employers should assess their existing pension plans to ensure they are competitive and compliant with the new regulations. Preparing payroll and HR systems: Update systems to handle requirements to avoid a
last-minute scramble before the deadline. Communicating with employees: Employers should inform their workforce about
what auto-enrolment means for them. The introduction of auto-enrolment is a significant shift in how pensions are
managed in Ireland. By preparing now, employers can ensure compliance, while employees can look forward to greater financial security in retirement.
