Making Cents - Are you interested in the new auto enrolment pension scheme?

THERE has been much talk of late about the pension auto-enrolment scheme (AE), which has been given the go ahead to formally launch on September 30, 2025, which is why I want to spend some time this week explaining what it is, how it might apply to you, why you should consider joining and sticking with it and what it could mean to you in euros and cents when you are older.

The premise behind the scheme is to ensure that every employee and their employer will pay into a workplace pension plan that will help bolster the employee’s income in retirement.

So, rather than just relying on the state contributory pension as their only source of income when they are older and retired, they will have an additional extra income which will come by way of contributing to this new pension plan.

The maximum state contributory pension is currently €277 per week or €14,420 per year and who knows what it will become in the future? Which is why it's important people take responsibility and control and have more certainty over what their income in retirement will look like.

The reason any social welfare system was introduced by governments all over the world in the first place, which included a state pension, was to provide an income to low paid workers when they retired.

It wasn’t designed or set out to become your only source of income. But as the years rolled by, it became a safety net for people who didn’t make any personal provisions themselves. And believe me when I tell you, the state pension in its own right is nowhere near enough to maintain a reasonable standard of living when you’re older and not working. I meet people all the time struggling to eat, heat their home or pay for things like health insurance all because they have to live off €39 a day, and that’s no way to live.

And €39 a day is a best case scenario, it could even be lower than that, depending on the number of PRSI contributions you made during your working life.

You don’t want to be relying on the state pension as your only source of income and it’s not ideal holding out and hoping the government might increase the amount they give you every year come budget time by say an extra €5 each week when the cost of living is going up €50 every week.

Which is why I believe the introduction of the auto-enrolment scheme is welcome and a much needed initiative because apparently there are about 800,000 people in Ireland who have no private pension of their own. And about 600,000 of those pay tax at the lower rate of 20% and 200,000 are on the higher rate tax band of 40%.

Okay, so how does this new initiative apply and who is it targeted at?

It applies to people who are currently not paying into a private pension and who meet the following criteria:

• they are aged between 23 and 60

• they earn more than €20,000 per annum, and

• they are not paying into a private pension such as the one offered by their employer

If the above is you, then you will be automatically enrolled into the new AE scheme which is going to be run by a new, state-owned, body, called the Central Processing Authority (CPA).

All employers will need to facilitate this new initiative regardless of whether they have an existing pension scheme in place already, and employers must contribute to it.

The initial contributions will be 1.5% of the employee’s gross annual salary, and 1.5% from their employer. This amount will be increased on a phased basis over 10 years with 1.5% added every three years until a total of 6% is reached from both the employee and employer. The pension will also be topped up by the State at 33%, with employer and State contributions capped at €80,000 of earnings.

It will look like this in practise.

It’s important to note that the contributory rates are based on gross salary but are deducted from net salary in respect of the employee contribution.

The CPA who as I already said will run the scheme, will provide employees with a limited range of investment options of where their money will be invested and that will include a low to medium risk default fund, together with three other fund options, classified as low, medium, and high risk.

Membership of the AE scheme is compulsory for the first six months with members then having the opportunity to opt-out. Those who opt-out will automatically be re-enrolled after two years.

And whilst some may feel this is a bit forced upon them, it really is for their own good, and I’m hoping they won’t opt out if they can at all, and from a monetary perspective let me explain why.

And no better way I think than giving you a real life example. Let’s assume John who’s 30 and earns €45,000 per year continues to opt out of the AE every time he can and is only going to rely on the state pension when he retires. And let’s assume he qualifies for the maximum state pension which is €14,420 every year.

From 66 onwards, the state will lodge about €275 per week into John’s account which he has to make last until the following week so he has on average c. €39 available to spend/use each day.

Danny on the other hand who is also 30 and he too earns €45,000, decides to join the AE scheme.

This is what Danny is going to contribute:

Years 1-3 it will cost him €56 per month

Years 4-6 it will cost him €113 per month

Years 7-9 it will cost him €169 per month

Years 10 onwards it will cost him €225 per month

When Danny is 65, he’ll have a fund valued at about €459,453 and that’s based on an average annual growth rate of 6% and accounting for inflation at 1% per annum.

What that means for Danny is two things:

He’ll get a tax free lump sum of €114,863 and he’s free to do whatever he wants with it, and

He’ll also receive a gross annual income of €20,675 (6% withdrawal rate)

At 66, Danny will have his AE fund and his state contributory pension and when you combine both it will mean that c. €610 will be lodged into his account every week which means he has €87 to spend and use every day. And don’t forget he still has that €114,863 in cash available that he could top up his pension by if he wanted to.

When you stand what Danny and John are going to have, the difference is significant.

The state pension is paid every Friday, so if John spent the same €87 that Danny has, he’d run out of money by Monday, whereas Danny can go from Friday to Friday spending his €87 every day.

Let me put some more numbers beside each other again under different headings:

I haven’t included in the numbers above that over those 35 years, Danny chose to accept the state's contribution which amounted to €27,450 or €784 every year or €65 every month.

John said no thanks to those amounts on offer from the state. And maybe John just doesn’t have the money at the moment to contribute and I understand that but I do think that if he knew what the difference was and what the outcome could be when he’s older, he might be more motivated to find that €1.84 it would cost him every day for the first three years or that €3.70 the following three years and so on, because when you break down the cost to a daily amount it mightn’t seem as bad as he thought.

I’d say to John, just think of what you’re doing is simply helping out your 65 year old self and perhaps giving up the cost of a coffee or something else very small each day is going to give you the freedom and control over your quality of life when you’re older.

You work hard today so one day you won’t have to and if you don’t want to live pay cheque to pay cheque when you’re older and you don’t want your quality of life to be determined by someone else, you have to take matters into our own hands by taking personal responsibility and that’s by either joining an employers’ pension scheme or joining this new AE one.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at [email protected] or www.harmonics.ie