The QI sees the government’s new auto-enrolment pension set to start in early 2024. I understand that under that scheme, the contributions paid by the employees would be matched by their employers and that the state would also add a top-up to the money paid. Pension pot. I’ve been paying into a company pension plan for the past ten years – and my boss doesn’t pay any employer contributions to that plan. Given that the employer’s contribution will be paid under the auto-enrolment scheme, when the auto-enrolment starts, would it be better for me to leave my work pension plan and join the auto-enrolment scheme instead? rose, cum donegal
a The auto-enrolment system is most welcome as at present about a third of employees do not have supplementary pension savings outside the state pension. The final design of the auto-enrolment plan has not been finalized and it will be interesting to see how this company operates with the pension plan that your current employer sponsors – especially the tax relief, contribution level and investment options available. About.
Under the planned auto-enrollment system, the state will offer a subsidy of €1 for every €3 paid by the employee – which is equivalent to receiving tax relief at the rate of 25pc. (The state subsidy is to be paid on a maximum earning of €80,000.) Under the Company Pension Scheme, which you are currently paying, you are getting income tax relief at the lowest rate on your pension contributions. Either 20pcs or 40pcs. So the auto-enrollment state subsidy will be more beneficial than the tax relief you currently get on your pension contributions to your work pension plan if you get income tax relief at the rate of 20pc – but not if you get income tax relief at the rate of 40pc.
Under the planned auto-enrollment scheme, the initial combined employee and employer contribution rate for an employee earning up to €80,000 in 2024 will start at 3 pc of earnings – increasing to 12 pc in 2034. This rigid contribution structure, coupled with the fact that employees will not be in a position to pay additional contributions, can make the automatic enrollment system less flexible and unattractive from the point of view of a typical pension plan member.
You should continue to contribute to your work pension and assess the situation after auto-enrolment is complete.
My PRSA after joining work pension with new job
QI has an Individual Retirement Savings Account (PRSA) which I set up myself about ten years ago and in which I was saving all my time. I have just taken up a new job – through which I have joined a defined benefit pension plan. Can I continue to contribute to my PRSA? Ian, Co Wexford
a As you are joining a company-sponsored pension, your contributions to your current PRSA will need to be depleted. Going forward, you may wish to make pension contributions in addition to your normal contributions to your work pension plan. Such contributions are known as Additional Voluntary Contributions (AVCs) and can be either your own AVC PRSA (if you cannot create an AVC through your employer’s pension plan) or your new employer’s AVC plan (if you cannot create an AVC through your employer’s pension plan). If your employer has set up an AVC plan). ,
While you currently have a PRSA, an AVC PRSA is an entirely separate contract that is tied only to your own pension contributions from your new job. Your existing PRSA cannot be converted to an AVC PRSA. If your employer has an AVC plan, tax relief on your own contributions to that plan can now be given through your employer’s payroll—so unlike your current PRSA, you’ll have to reap the tax relief on your contributions. There should be no need.
There are a few important points to keep in mind regarding any PRSA you have. First, you should review your PRSA annually. Your PRSA provider is obligated under the law to send you a statement every six months. This will allow you to review how PRSA is performing and whether any investment switches are needed.
You may have the option of transferring your current PRSA to your new employer’s AVC plan (if it has one). There are pros and cons to moving your PRSA, so it’s important to get independent financial advice before doing so.
Decisions to be made in order of retirement
Q I am planning to retire in two years at the age of 65. I have a company pension which I have been saving for the last 35 years – plus some pension which I have saved for a few years early in my career. What decisions will I need to make around retirement finances as retirement approaches? Allen, Co Lout
a There are several important areas that you should focus on as you approach retirement.
One is cashflow planning – where you forecast your assets, taxes and liabilities along with your income and expenses throughout your lifetime. Consider seeking some independent financial advice to get a realistic indication of how much you’ll 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 based on your circumstances – is also important. In terms of specific decisions that you will need to make a pension around you, review whether you are maximizing your pension contributions and, more importantly, consider where your retirement account is invested. Pension funds have been extremely volatile from year to year, and you must ensure that the fund you have invested in is suitable for a person with two years to go for retirement.
Tax planning – where you develop a plan with the aim of reducing the amount of tax payable in your retirement while complying with all tax laws – is another important area.
So is estate planning – specifically how you can maximize the value of your assets by minimizing taxes and other expenses.
Social welfare should also be considered as you will need to assess in advance whether you are on track to receive social welfare benefits in retirement.
Finally, prepare a list of your expenses – including day-to-day expenses (such as food and electricity) and one-time 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. Also consider whether you should set aside some money for long-term care in case you need this kind of care in old age.