Minister for Social Protection, Heather Humphreys, published the framework for the pension auto enrollment scheme. This is something that has been talked about since 2007, so it is good to see things moving forward and it looks like it is actually going to happen. We have written about this before, so I am not going to go into all the details again. The announcement document did give us more detail on how the scheme will work in practice.
If you are between the ages of 23 and 60 years of age and earn at least €20,000, you will automatically join the scheme. You then have to opt out of the scheme if you no longer want to be in it. You will automatically rejoin the scheme every two years and have to opt out of it again.
If you are outside those ages or earnings, you can opt into the scheme. You will not join it automatically.
There is an earnings cap of €80,000 for employer contributions. If you earn over this amount, no employer contributions will be made for anything over this amount.
The contributions are going to be rolled out over a 10 year period.
There is no tax relief on employee contributions, they will be paid from your net salary. The State will add a contribution to your pot. The reason for this is that everyone gets the same level of State contribution whether you are paying tax at 20%, 40% or not paying income tax at all.
Employers can get tax relief on their contributions as a business expense.
Members will automatically join the scheme but will have the option to opt out.
You can suspend your contributions at any time. If you do suspend your contributions, the employer and State contributions will be suspended too.
If you opt out or suspended your contributions, you will be automatically enrolled again after two years.
There will be four different fund managers or Registered Providers (RPs) managing your money. You will have a choice of 4 different funds under each RP:
The default fund will be a lifestyling fund. That is a fund that reduces its volatility exposure the closer you get to retirement. If you do not pick a fund, you will automatically be in the default fund. Most investors are expected to chose this option. When you pick your fund option, your money will then be split evenly between the found RPs.
The RP will only be responsible for the investment of money. They will not have any involvement in the administration of your pension pot. In fact, they won’t know who’s money belongs to who as the money is pooled and the Central Processing Authority (CPA) will be responsible to knowing the value of your money.
There will also be a cap on the annual management fee of 0.5%. There will be a tendering process to see who will become a RP so we will know if the charges will in fact be lower than this amount. The RPs will be put out to tender every 5-7 years thereafter.
Retirement age is tied to the payment of the State pension, which is currently 66. The only option to access your fund earlier is ill health early retirement. This is a mistake in our opinion and people should be allowed to access their pension fund from age 60 if they want to and finish their membership of the scheme.
At retirement, the investor will then use existing retirement products such as annuities and ARFs from life insurance companies. They have said that they may offer post retirement products in the future.
It is not clear at this stage what form the tax free lump sum will take. I can imagine it will be 25% of the value of the fund.
04 April 2022