My daughter is not part of any pension scheme and only pays PRSI. I have been encouraging her to take out a small PRSA to help in the future.
She has been waiting almost two years for the Government auto-enrolment scheme to start. Would taking out a PRSA prevent her from joining the auto-enrolment scheme, when it eventually starts?
Mr R.H.
Ah, when it eventually starts. Not that it will reassure you much, but there are people who have been waiting on this for considerably longer than your daughter.
Auto-enrolment – an arrangement that would automatically enrol workers in a scheme to provide private pension income in retirement – has been a subject of discussion in government circles since Séamus Brennan was minister for what was then called the department of social and family affairs almost 20 years ago, in 2006.
It has been long-fingered by successive governments, presumably concerned at a political backlash from workers at the notion of seeing their pay packets being reduced to fund such a scheme. Meanwhile, occupational pension coverage of the Republic‘s workforce outside of the State pension has more or less stagnated.
Just recently, the latest deadline was pushed back from September to the start of next year. But with the news last week that the chief executive of the new National Automatic Enrolment Retirement Savings Authority (Naersa), which will be responsible for administering the scheme – will only be appointed in autumn – even that must be in doubt.
It doesn’t give them much time to get things up and running, even if there are no further delays. Even the notice of that chief executive recruitment stated the scheme was “due to launch early next year” as against the start of next year, which is not exactly reassuring.
I’m very conscious that younger people think their working life will extend forever, but the reality is that your daughter is already likely one-twentieth through her working life. With the magic of pensions being investment performance over time, that’s not insignificant.
And, in terms of her pension, the data on women and pensions suggest that she could well lose a chunk of time (and, subsequently, pension) due to family commitments at some point over the coming years. That may be discriminatory, even sexist, but it is also a fact. The figures do not lie.
All of which makes it even more important for women to start a pension as early as possible in their working life.
So should she wait for auto-enrolment? And will opening a PRSA – a personal retirement savings account – stop her accessing auto-enrolment when it does eventually come on line?
No and no are the succinct answers to those, but as always, there are caveats.
I understand from your query that her company does not offer an occupational pension option – PRSA or otherwise. They should do so, by law, but they would be far from the only employer to have sidestepped that obligation over the years.
To quote the Pensions Authority – the regulator of the sector: “There is no legal obligation on an employer to set up or contribute to a pension scheme.” However, “if your employer doesn’t have a pension scheme or if you are an ‘excluded employee’, your employer will need to provide you with access to at least one standard personal retirement savings account (PRSA).”
Of course, it is the Pensions Authority that should have been keeping tabs on employers over this, but there you go.
If your daughter opens a personal PRSA and makes contributions directly into it herself, it will not adversely affect her ability to sign up under auto-enrolment. However, if she is making those contributions through her employer – via payroll – then she will not be eligible for auto-enrolment, either by being enrolled by the State or opting in.
As the Department of Social Protection put it in answer to my query: “If they are investing in a personal PRSA outside of payroll, that is a personal choice and Naersa will not have sight of that arrangement.
“If an employee is investing in a personal PRSA and is actively making contributions through payroll [that means directly from their payslip], they are not eligible for the scheme and will not be automatically enrolled.
“Opt-in is only available to those who are between 18-66 with no active supplementary pension contributions recorded on their payslip.”
That means there is no reason for her to long-finger the process. So what’s the advantage of going now?
First, she starts investing money for retirement, giving it as much time to grow into as large a fund as possible. More attractive to her, probably, is the tax relief that will allow her to boost the fund.
Contributions to an occupational or personal pension attract tax relief at your marginal, or upper, rate up to a certain maximum. For someone in their 20s, you can put up to 15 per cent of your salary into a pension and get full relief.
This means she pays no income tax on anything up to 15 per cent of her salary that she puts in the pension. In effect, if she pays tax at the top 40 per cent rate, every euro going into her pension costs her only 60 cent, or 80 cent if she pays tax and the standard 20 per cent rate.
As she gets older, she can put even greater portions of her salary into a pension – provided her personal finances allow.
Certainly, for those paying tax at the 40 per cent rate, the benefit is greater than it will be under auto-enrolment where the Government commitment is only to pay €1 for every €3 invested by the employee.
So why should she be keen to avail of auto-enrolment then?
Well, in her personal PRSA, the only contributor is her, albeit with attractive tax relief. Tax relief under auto-enrolment may not be quite as attractive – at least if you are paying tax at the higher rate – but her employer will also have to match her contributions. That makes it a more attractive option for someone in her position.
And the even better news is that there is nothing in the rules around auto-enrolment to prevent her also contributing to her PRSA, if financial circumstances allow.
That is important, especially in the early years of auto-enrolment. Initially, the new workplace pension scheme will take just 1.5 per cent of her gross salary. With the matching contributions of her employer and the €1 for €3 pro-rata contribution from the State, her auto-enrolment pension account will get contributions of just 3.5 per cent of her gross salary for the first three years of its existence.
That will rise over time – to a combined 14 per cent of her salary from year 10, of which 6 per cent will come from her pay – but that’s still 10 years down the line by which stage she will be over a quarter of the way through her working life, even assuming she takes no time out for family or other commitments.
Her private PRSA will allow her “top up” her retirement fund on a private basis, with the benefit of income tax relief.
It would be no harm for her to put in the 6 per cent of gross salary from the outset, which will get her used to the ultimate impact of auto-enrolment. As auto-enrolment kicks in and the contribution levels rise every three years, she could offset that by lowering her PRSA contributions if finances were tight.
Ideally, she would set aside a bit more but even if it is less, it is better to get started now than to wait. Apart from anything, the pension savings habit is worth nurturing.
And if she decides not to invest further in the PRSA once auto-enrolment kicks in, at least initially, her PRSA fund will continue to be invested and, barring market mayhem, grow over time.
The 15 per cent limit to how much she can put into her pension fund for tax relief purposes applies across both auto-enrolment and the PRSA ... as long as her contributions to that PRSA do not come through her employer’s payroll.
So, she loses nothing by opening a private PRSA now. In fact, it will increase her options if and when auto-enrolment arrives, not exclude her from it.
And if she moves jobs and joins a company with a better pension scheme down the line, she can opt out of auto-enrolment at that stage.
- Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice
