Auto-enrolment: What You Need to Know
The government has announced details of a new auto-enrolment pensions savings scheme. It’s designed to encourage workers to save for their retirement and make it more straightforward for businesses to offer a workplace pension option.
What is auto-enrolment?
Auto-enrolment is a pension investment scheme for employees, which involve their employer matching their contributions of a set percentage of their gross income with a top-up from State funds.
An estimated 750,000 employees earning more than €20,000 per annum and aged between 23 and 60, and who are not already enrolled in an occupational pension scheme, will be automatically enrolled in the new scheme.
The accumulated funds plus investment returns will be paid to participants upon their retirement in addition to the State pension, at age 66.
How auto-enrolment will work?
All employees – current and new – who fit the eligibility criteria and who are not already enrolled in a workplace pension scheme will be automatically enrolled in the new scheme.
Eligibility
- Employees aged between 23 and 60 earning more €20,000 per annum
- Those earning below the income threshold or aged outside of the parameters will be able to opt in to the system.
- Members of an existing occupational pension scheme won’t be automatically enrolled for that employment. Employees who are on probation, or are casual or working on a part-time basis will be assessed by a new Central Processing Authority (CPA) to determine eligibility.
Opting in/out option
All eligible employees will be automatically enrolled in the scheme. Participation is optional and operates on an opt-out basis.
Employees who have been automatically enrolled can choose to opt out or suspend their participation after six months. Those who opt out will be auto-enrolled after two years have elapsed and they can opt out again after another six months.
When will the auto-enrolment scheme begin?
The scheme is to launch for the end of 2023 and paid contributions to start from January 2024.
Contributions will be gradually phased in over 10 years, with employee and employer payments beginning at a modest level of 1.5% and increasing every three years by 1.5% until they reach 6%.
How businesses can prepare for the new legislation?
The workplace pension scheme is designed to minimise the administrative burden on employers who will not need to set up and run an occupational pension scheme.
Instead, employers will be responsible for recording employee-related data via a simple payroll instruction. The scheme will begin at a modest level in 2024 and increased at a set rate until 2034. This gives your business time to prepare for the scheme.
You’ll need to review the following areas and plan accordingly:
- Payroll
- Contracts
- Communication with employees
- Financial management
An employer who fails to fulfil their obligations under the scheme, including implementing a payroll instruction for enrolment, and/or deduction or remittance of contributions as required, will be subject to penalties.
Employment contracts
In advance of the legislation coming into force, you’ll need to review employment contracts.
You should consult your solicitor well in advance of the January 2024 roll-out to ensure your employment contracts are updated to include the provision for pension contributions and any other legal details required.
Communication with employees
Employers have a full year to ensure employees fully understand the scheme before it begins in January 2024. This will give you time to communicate with your employees about how it will work.
You should provide details of the scheme and advise employees on the four fund options, how much they will contribute, tax implications and the benefits of the scheme, including the employer and State contribution.
Employee contributions will be taken from net income, after deductions of income tax, pay related social insurance (PRSI) and universal social charge (USC).
Tax relief won’t apply in respect of these contributions. Instead, the State tops up the pension fund at 33% of the employee contribution.
Participants in the new scheme will still be entitled to receive a ‘benefit-in-kind’ tax exemption in respect of their employer’s contribution.
