Q I see the Government’s new auto-enrolment pension is due to start in early 2024. I understand that under that plan, contributions paid by employees will be matched by their employers and that the State will also add a top-up to the money paid into the pension pot. I’ve been paying into a company pension scheme for the last ten years – and my boss doesn’t pay any employer contributions into that scheme. Given that employer contributions would be paid under the auto-enrolment scheme, when auto-enrolment kicks in, would it be a better idea for me to leave my work pension scheme and join the auto-enrolment scheme instead? Rose, Co Donegal
A The auto-enrolment system is most welcome given that approximately one third of employees currently do not have supplementary pension savings outside of the State pension. The final design of the auto-enrolment scheme has not been finalised and it will be interesting to see how it operates alongside the company pension scheme which your current employer sponsors – particularly in relation to tax relief, contribution levels and the investment options available.
Under the planned auto-enrolment system, the State will offer a subsidy of €1 for every €3 paid by the employee – which is the equivalent of getting tax relief at a rate of 25pc. (The State subsidy is due to be paid on up to a maximum of €80,000 of earnings.) Under the company pension scheme that you’re currently paying into to, you are receiving income tax relief on your pension contributions at the marginal rate of either 20pc or 40pc. So the auto-enrolment State subsidy would be more advantageous than the tax relief you’re currently getting on your pension contributions into your work pension scheme if you receive income tax relief at the rate of 20pc – but not if you receive income tax relief at the rate of 40pc.
Under the planned auto-enrolment scheme, initial combined employee and employer contribution rates in 2024 for an employee earning up to €80,000 will start at 3pc of earnings – rising to 12pc in 2034. This rigid contribution structure, coupled with the fact that employees will not be in a position to pay additional contributions, may make the auto-enrolment system less flexible and unattractive from a typical pension scheme member’s perspective.
You should continue contributing into your work pension and assess the position further after full details of auto-enrolment materialise.
Q I have a Personal Retirement Savings Account (PRSA) which I set up myself about ten years ago and into which I’ve been saving all that time. I’ve just taken up a new job – through which I have joined a defined benefit pension scheme. Can I continue contributing into my PRSA? Ian, Co Wexford
A As you are joining a company-sponsored pension, your contributions into your current PRSA will need to cease. Going forward, you may wish to make pension contributions in addition to your normal contributions to your work pension scheme. Such contributions are known as Additional Voluntary Contributions (AVCs) and these can be paid into either your own AVC PRSA (if you cannot make AVC’s through your employer’s pension scheme) or your new employer’s AVC scheme (if your employer has set up an AVC scheme).
Whilst you currently have a PRSA in place, an AVC PRSA is an entirely separate contract which is linked to your own pension contributions from your new job only. Your existing PRSA cannot be converted to become an AVC PRSA. If your employer has an AVC scheme, tax relief on your own contributions into that scheme can now be facilitated through your employer’s payroll – so unlike your current PRSA, there should be no need for you to reclaim tax relief on your contributions yourself.
There are some important points to keep in mind in relation to any PRSAs you have. Firstly, you should review your PRSA annually. Your PRSA provider is obliged under legislation to send you a statement every six months. This will allow you to review how the PRSA is performing and whether any investment switches are required.
You may have the option to transfer your current PRSA into your new employer’s AVC scheme (if it has one). There are pros and cons to transferring your PRSA so it is important to get independent financial advice before doing so.
Q I’m planning to retire in two years time when I’m 65. I’ve a company pension which I’ve been saving into for the last 35 years – as well as a couple of pensions I saved into for a few years in the early stages of my career. What decisions will I need to make around retirement finances as I approach retirement? Alan, Co Louth
A There are a number of important areas which you should focus on as you approach retirement.
One is cashflow planning – where you forecast your income and expenditure as well as your assets, taxes and liabilities throughout your lifetime. Consider getting some independent financial advice to get a realistic indication of the amount of money you will need in retirement.
Another is investment planning – where you determine how to invest current assets and future savings based on your financial goals, your attitude towards risk and your current financial position. Again, independent financial advice would be useful here.
Pension planning – where you review your pension and make decisions around it, depending on your circumstances – is also important. In terms of specific decisions that you will need to make around you pension, review whether you are maximizing your pension contributions and more importantly, consider where your retirement account is invested. Pension funds have been extremely volatile in the year-to-date, and you should ensure the fund you are invested in is suitable for an individual with two years to go to retirement.
Tax planning – where you develop a plan aimed at minimising the amount of tax payable in your retirement, while complying with all the tax legislation – is another important area.
So too is estate planning – particularly around how you can maximise the value of your estate by reducing taxes and other expenses.
Social welfare should also be considered as you will need to evaluate in advance whether or not you are on track to receive social welfare benefits when you become entitled to them in retirement.
Finally, put together a list of your expenses – including day-to-day expenses (such as food and electricity) and once-off costs (such as insurance if paid annually, and holidays). This will give you an idea of the costs that you need to prepare for as you approach retirement. Consider too if you should set aside some money to cover long-term care in the event that you might require such care in old age.