The Minister for Social Protection has presented to government the final design principles for a proposed auto-enrolment retirement savings system for Ireland. We are still awaiting the publishment of the Automatic Enrolment Bill which is expected sometime before the end of this year. According to the Department for Social Protections website (December 2023) the commencement date for AE was to be the second half of 2024, but it now looks like it will be sometime in 2025.

From what we know so far, the number of workers without a pension benefit is thought to be around 750,000 and of that cohort the department of social protection estimate that 200,000 of these workers pay higher rate (40%) income tax. If their employers do not take any action in terms of including those employees in a Master Trust or employer sponsored PRSA between now and AE launch, those employees will be included in AE.

Some of the design features of Auto Enrolment include:

Contributions: Contributions are to be made by employers, employees and the State to a defined contribution arrangement which will be administered by a state-run Central Processing Agency. Contributions will start off small (1.5% employee, 1.5% employer and 0.5% from the State) and will increase over a ten-year period to a total of 14% of salary (6% employee, 6% employer and 2% from the State).

Investment: Members will have four different investment options to choose from which include a default option, a conservative option, a moderate risk option and a higher risk option. Those funds will be provided by four separate providers, however actual returns achieved for members in their chosen fund will be pooled based on the returns achieved by the four providers for that fund type.

Retirement: Access to the Auto Enrolment scheme will be linked to the age for state pension access which is currently age 66. Although it is of course welcome that more people in Ireland will now have a pension in retirement, it is important to understand that employee’s included in AE will not enjoy the same benefits currently available in traditional pension arrangements. It should be noted that employees would:

• not be entitled to 40% tax relief (where earnings are sufficiently high).
• not receive financial advice (no advisor linked to the scheme).
• have less flexibility in terms of investment choice.
• not be able to make Additional Voluntary Contributions (AVCs) as this is not possible under current guidelines.
• not be able to access funds until state pension age which is in stark contrast to rules in occupational pension schemes which can allow access from as early as age 50.

We expect 2024 to be a year where employers seek the advice of Financial Brokers in terms of their pension obligations for employee’s. We have already seen many employers seek to satisfy their future obligations in terms of pension provision under the traditional route by setting up an occupational pension scheme (Master Trust) or employer sponsored PRSA and thus avoiding Auto Enrolment.

As part of this 2024’s Budget, the maximum rate of state pension was increased by €12 per week for those on the top rate of payment with those on lower rates to receive increases on a pro rata basis.

Further changes to state pensions were also announced:

• Changes to State Pension (Contributory) access for long-term carers which mean that period’s of 20 years or higher in which you are registered as providing care to an incapacitated person can be included in your PRSI record.

• From January 2024, the State Pension (Contributory) will become more flexible. You will be able to drawdown your pension at any age between 66 and 70 using flexible options.

• Changes to the method in which pensions are calculated. The current basis for determining the pension payable known as the Yearly Averaging approach will phased out over a 10 year period and replaced with the Total Contributions Approach. This phasing out period commences in 2025 and will be finalised by 2034 with all pensions calculated under the Total Contributions Approach from that point on. The Total Contributions Approach requires 40 years worth of PRSI to qualify for the maximum rate of state pension with lower rates payable for those with between 10 – 39 years of contributions calculated on a pro rata basis.

Looking forward to 2024, the major change on the horizon as part of the Finance Bill 2023 is in relation to PRSAs again and this time the proposal is to remove the current maximum age of 75 at which time under current rules the benefits in a PRSA or vested PRSA can no longer be withdrawn. This forced clients to mature PRSAs by their 75th birthday and in the case of vested PRSAs (where a lump sum had already been paid), move those funds to an ARF (Approved Retirement Fund) or use them to purchase an annuity.

It’s important to note that PRSAs will still automatically vest at age 75, so that at that time their value will be tested against the Standard Fund Threshold limit to determine if any Chargeable Excess Tax is owed and imputed distributions will commence at that time if sufficient withdrawals are not put in place. However the change will be that with effect from 1st January 2024, a Vested PRSA holder over age 75 can continue to take withdrawals from that Vested PRSA and is not required to purchase an ARF (but could still do so if they wish).

This will make the Vested PRSA an alternative to an ARF in retirement. We await to see how this will impact the post retirement market.

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