Pension Auto-enrollment


#1

Yesterday, the Dept of Welfare launched a consultation process on the introduction of auto-enrol pensions in Ireland. It’s not due to commence until 2022 but here are some of the main points:

Employee to contribute 6% of their gross salary (starts at 1% in yr 1 and ramps up to 6% over 6 years)
Employer to contribute 6% each up to €75,000 gross salary (same ramping up as above)
Government will contribute €1 for every €3 contributed by employee
Automatic enrollment for any one aged 23 -60 and earning over €20k
Can apply to leave in month 8 and 9 but will automatically be enrolled again in 3 years time
This won’t impact your eligibility to the State pension
Self-employed can opt in

independent.ie/business/per … 43240.html

A Q&A on the proposal
independent.ie/business/per … 43254.html

Now one major question I would have is with regards to the current pension relief which is at the marginal rate of 40% for those earning over 35k. Is that about to go to be replaced with the 25% rate mentioned above? Is that the long term thinking of the Govt here?
If yes, that’s going to make a lot of people think hard about putting money into pensions.


#2

Also the fact they raided private DC pension funds a few years ago - this would generate a nice pot to be raided come the next crisis


#3

That’s a real danger alright


#4

I think opt out is a better system if they do it correctly. It’s madness that over half of employees have no pension beyond the state pension contributory, currently a max of 218 euro a week

It seems very generous to me:

I put in 6%;
Employer matches it so another 6% up to 75K gross;
State pays 1euro per 3.

And I save tax on my payslip of 20/25/40%, not clear which yet

I can see public servants, who already ave a State pension, wanting to also do an AVC like this to top up their retirement income


#5

What does it all do to the existing pensions market?


#6

or you possibly save 0% tax on your payslip as the states 1 euro per 3 is the new “tax relief”


#7

No idea. All I know is that current standard PRSAs are obscene.

Costs for a standard PRSA are legally 5% of deposits plus 1% of the fund value per year. There is also another hidden charge of they apply of approximately 1% of the fund value per year in costs, making it about 2% per year in general.

How does this affect people? Over a normal 35 year period people will lose half of their fund in costs. If someone was paying a reasonable amount into a PRSA of €10k per year it works out that they are going to pay the PRSA provider half a million in costs.

The question is are these costs reasonable? Compare these costs to a Vanugard fund. Vanguard, for those who have never heard the name, are the worlds second largest money managers. Anyone that has a DC pension that allows you to choose between multiple funds, stocks, trackers, bonds etc. this is the type of thing that Vanguard supply. They offer the type of funds that standard PRSA providers offer at a cost of about 0.05% a year with no deposit costs.

Over a normal 35 year period you would pay Vanguard 1% of the total value of your savings in costs; a standard PRSA 50%.


#8

They are the legal maximums. You can find a lot cheaper if you shop around and are willing to make the payments and tax returns yourself, though nothing as cheap as in the US.

This endless fiddling with levies, rules and reliefs turns people off.

We have the structures there already, we don’t need a new one. Reduce the legal maximum charges on PRSAs to non-extortionate levels and auto-enrol people in them. Make the employers remit by payroll to a central clearing house. From there it can go into some sort of ‘default’ PRSA managed by the NTMA or redirected to a provider and plan of my choice.


#9

Sounds like a Superannuation fund that been run in Australia since the 80s I think. In recent years people have been allowed draw down early without penalty for investing in property to keep the ponzi scheme pumped. No doubt such allowances will be attempted in ireland.


#10

Brendan Burgess is including this in his submission of suggestions and I heard some guy from Mercer on Breakfast Business suggest similar also yesterday morning.


#11

All indications are you will save 0% on your payslip so the 1 euro per 3 is the new “tax relief” so in effect the 40% relief is being cut


#12

When I started a pension the relief included PRSI and was around 50%, now it’s 40%, and possibly in 5 years or so will be 25%.

Ignoring any employer contributions…

A fund of 400,000 @ 50% relief costs 200,000.
A fund of 400,000 @ 40% relief costs 240,000.
A fund of 400,000 @ 25% relief costs 300,000.

Tax relief @ 25% means you put in as little as you can, just whatever’s needed to get your employer’s contribution.

Since it’s getting to tax return time, I’m considering maximizing pension AVCs for the remaining 5 years or so (incl. 2017), then switch to minimal contributions if they bring in this scheme.
I will not be surprised if the first impact of this news is unexpectedly large pension tax refunds for 2017.


#13

That was my initial thought. It looks like the relief will go, or be reduced. So makes sense to contribute more now.


#14

Does anyone know if it’s possible to backdate tax relief on pension contributions made this year for previous years where the person didn’t use up their full allowance?
I know I can make an AVC now for 2017, but can I go back further e.g. get tax relief on contributions made on tax paid in 2016 or before?

I’d assume the answer is ‘no’ but just throwing it out there!


#15

I really like the idea of matching exchequer contributions. This makes the upfront cost much more transparent than the current policy of using tax reliefs, where it is very murky who is benefiting and there tends to be very little parliamentary scrutiny.

The big issue with coverage is people in the middle of the earning distribution (30k-50k) who experience a big dip on retirement if they only have a contributory state pension which is a little less than €13k. High earners tend to be public sector, or else private sector taking advantage of generous tax reliefs.

Making someone on €20k (say part time in retail) make big pension contributions strikes me as daft. When you consider the €13k state pension they will likely end up with a pension income nearly as big as their wage during working life.


#16

I wonder what effect this will have on the current economy. I suspect that it might be deflationary, but then, that might be no bad thing, under present circumstances.

People on low incomes will have both a goad and an incentive to save into pension funds, since they’ll be compelled to do so and will also have a greater incentive to do so (25% tax relief, instead of 20% and their employers will be forced to contribute).
This will give them less disposable income, which will make their daily lives more difficult, unless their reduced spending power drags prices down. (we can hope. :unamused: )

People on middle incomes, but paying higher rate income tax, like me will find paying into pensions less of a free lunch. How they react will be a matter of attitude. Since my fund would grow more slowly, I’d squeeze my spending harder, so that I could save more to compensate for the lower effective return (also deflationary). Other people might react differently…

As for the rich, well, it’s not really their problem. After all, they’re rich. :wink: 8DD


#17

sounds like an excuse to replace or reduce the contributory pension at some point in the future. It’s not much but at least it is currently guaranteed like a DB pension (assuming the economy doesn’t completely tank but it was barely touched during the crash).


#18

Given that PRSI (Employer and Employee) was collected to serve this purpose in the first case I think it makes more sense to see this as a straight ahead PRSI hike of 6 percentage points on both sides. At 10.85% our employer PRSI is one of the lowest in Europe (the European average is 20% - home.kpmg.com/xx/en/home/servic … nline.html) - another of our employer-related tax advantages.

We don’t collect property taxes to the extent that other countries and we have no wealth tax whatsoever. We don’t even stick to the corporate tax rates that we claim to collect and avoidance is incredibly easy and worthwhile for anyone earning over 200k per year.

That’s why our tax burden is carried by such a small proportion of our population and we could fix it. I think the response to this from the general public is going to be two fingers when they figure out what it is - it certainly won’t be as muted as the response on here.


#19

This will be news to a lot of people earning over 200k per year. Given our very very progressive income tax regime, people earning over 200k per year pay a disproportionate share of the income tax take. Can you back up that statement? Don’t confuse corporate tax with individual income tax.

The bottom 36.6% of earners pay no net tax at all. irishtimes.com/business/per … -1.2841652

This Public Policy document from 2009 shows that those earning over 200K despite making up 10.13% of taxpayers they are responsible for paying over one-fifth of the total income tax take. 22.1%. publicpolicy.ie/wp-content/u … xation.pdf

Given that these 200k+ pa taxpayers are probably already maximising every available tax relief including maximising pension contributions etc the fact that they still are responsible for 22% of the income tax take despite making up just 10% of taxpayers doesn’t fit with the populist narrative that if you earn over 200k pa that “avoidance is incredibly easy and worthwhile for anyone earning over 200k”


#20

No wonder property prices are so high - 10.13% of the workforce earn €200k + :slight_smile:

I think the correct figure might be 1.013%