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Facts you may not have realised about the new auto enrolment pension scheme

Thomas Fitz-Gough, pension specialist at First Choice, joins Joe to discuss auto-enrolment and any other new restrictions for pensions.

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Duration:: 11m
Broadcast on:: 05 Sep 2024
Audio Format:: mp3

Your views, your news, your limit today with Jonesh online 95. Workers are set to be automatically enrolled into a pension scheme from January, so what do employees need to know and what should you be doing now when it comes to a pension scheme and joining us is Thomas Fitzgough from first choice financial services here in memory. Good morning to you Thomas. How are you doing? Good, Joe. Good, and yourself. First of all, I optimistically said January for this auto enrollment. Do we believe it's going to happen in January? I think it might be a bit ambitious. I think it might be deferred for a few months, but I've been wrong in the past. I'd be wrong again. It's definitely getting the backing of the current government, and I think cross-parties are all behind us, so it will happen. I think it's been deferred on a number of occasions in the past, but you know, the bill has been passed by Heather Humphrey, the Minister for Social Protection, and you know, the auto enrollment retirement savings system bill 2024 is due to be launched in the first of January 2025, but there's just a few minor details, I believe, that need to be ironed out so far. And simply then, how will it work for the employee and how will it work for the employer? Okay, so it's a very simple system, so we're really copying what has happened previously in Australia, and in the UK, Australia have this up and running since 1992, the UK introduced legislation on it in 2012. Simply what they're trying to do is we've 800,000 people in the country currently who are not providing for a private pension or a company pension, so what they're trying to do is boost their savings for the day that they do retire, that they're not just relying on the state pension, okay? The state pension currently runs at 277 Euro 30 per week, nearly 14,500 per annum, so really what they're trying to do is capture the people that aren't providing for their retirement. So simply how it works at the moment, so from first to January, if we kick off then, one and a half percent of an employee's annual earnings will be contributed into a pension, okay? The government are going to top this up and the employer is going to top it up, so the employer is going to contribute also one match the contribution of one and a half percent, and then there will be a point, a half a percent top up from the government. So when you hear that, you think to yourself, it's a bit of a no-brainer to do it? Yeah, I would agree now, it's not a like for like with the current pension setup we have in the country, so if anybody's thinking about providing for retirement or pension planning at the moment, they need to get independent financial advice, because if your earnings are over a certain amount, or if you're paying tax at a higher rate, or if your employer has an existing scheme which they are contributing into A.E. or auto-enrollment may not be for you, because it's not a like for like there is no tax relief on it, it's not as flexible as a company pension plan or a private pension plan. So there is a lot of differences between where we are at the moment and what's being introduced. Okay, that's fascinating, so there's no tax relief. No tax relief, no, it is I would- So what kind of plan does it go into, where does it go with the money? Well, it's a pension plan, so it's really like a savings plan, like very similar to the old SSA where you contribute into it, your employer contributes and there's a top up. Okay, it goes into a savings plan where it will grow tax-free, but for anybody contributing say 100 euros a month, they're getting at the lower rate of tax, they're getting 20% of that back currently, or if they're in a high rate- If they're going into a plan of their own- Of a private pension or a company pension plan or in the higher rate of tax, they're getting 40% back. So can I ask you this, if someone listening this morning is an employee of a company, this auto-enrollment is coming in on the first of January, they already have a private pension. Would you say don't go for this or can they go for it alongside their private pension? Well, under the current bill, and this has to be ironed out, and this is why I think there may be a deferment or it might impact us a little bit later, but currently, if you're not paying into a pension true payroll, you're automatically enrolled in auto-enrollment. Okay, so straight away, you're in the scheme, and under the current bill, you're no longer getting tax relief on your private pension. Now, I think that has to be ironed out, and I'm sure it will be. Okay, but- Okay, right, well, no, that's a very serious issue. So if you already have a private pension, you're going to be auto-enrolled in this, which means you have to actively opt out of it, and if you don't under where it is right now, then you get the tax relief taken from your existing private pension. That is the bill as it stands, but- That's that. I mean, that's almost ridiculous. Yeah, look, on a time, you know, this is what happens sometimes when things are passed into legislation and then- So this is passed, this is law now? Well, it has, the bill has been passed, but we- So they'll have to go and amend it in realistic terms, because I mean, that seems like you're punishing somebody who has prepared a private pensioner rate. This is absolutely the case as it currently stands. This is what would happen. As it currently stands, but I do think that will change. Personally, I do think that will change. It almost has to change, but at the same time, if it's in law now, they will have to go back and put an amendment into the legislation and get that passed, right? Yes, I think there will be a number of amendments, personally. But I don't want to completely knock this down. This is a very positive thing by the government. They have been taught- I'm in pensions over 20 years, and there has been talk about it for the last 20 years. It is coming into the future. Can I ask a question, though? If they looked at other models, do they not spot this point that you've raised in the other models? I would have taught so by looking at the UK. A lot of our current rules and pensions do copy what goes on in the UK. I would think they would have looked at other models, but I would think that a lot of people that are going to fall into the other moment are people that are not providing true payroll anyway. It's not impacting currently self-employed people. If you have a private pension and you're not a member of a company pension scheme, or if you're self-employed individual, all the enrollment doesn't have an impact on you. Very clearly, if you either are part of a company scheme already, and it's taken out of your payroll as you say monthly, or if you have a private scheme that happens to go through payroll, which some do, then you will not be automatically enrolled. But anyone else will be, and they have to be aware of that, i.e. do they want to stay in it, or do they want to, for whatever reason, they might opt out. Exactly. Yes, exactly. And how do you do? You contact your company and your finance department to go, "Excuse me, I don't want to be enrolled in this." So it's opt out actually after six months. Oh, so you're in it for four or six months, regardless? Exactly. So currently, it's one and a half percent for the first three years. Then that's going up to three percent in year four to six, four and a half percent, seven to nine, and from year 10 onwards, it's six percent. Now, do you know what I bet you're one thing? There are people suddenly waking up listening to us this morning. Hang on a minute. What's this about? Sorry. I expect pensions will be a hot topic in 2025. The government will be, there will be a lot of media exposure, there will be a lot of advertisement on radios and on TV in relation to pensions. And you mentioned the old age pension. Daddy is likely to go up, isn't it, the old age pension, in the upcoming budget? They have been talking about this for a number of years as well. And that's another hot topic. I believe it's going to be pushed out on late '68 in the future. It could go beyond that. Yeah. So it's 66 at the moment. 66 at the moment. So to go up and place the amount per week that people get them, it's all not likely, it's a pre-election budget. Oh, of course, of course. And I don't think anybody coming into government is going to really be trying to push it out. But we will have to wait and see. No. If somebody chooses, and you're saying that they have a timer strength on this, it's only after six months that they can opt out. But isn't it also the case that at some point beyond that, they'll be up to back in again. Yeah, after two years. People are very determined to back it. Yes. And they're trying to do the right thing by it. But you know, if you're stuck on one and a half percent currently, you cannot move beyond one and a half percent. So you can't do an addition, voluntary contribution. A lot of people we would have in current employer schemes or private pensions are paying in anywhere five, 10, 15 percent per annum. Whereas with auto enrollment, you are actually, you have to stay a one and a half percent with the employer one and a half percent plus the half percent government top up. So I would recommend for anybody out there to speak to an advisor, speak to retirement planner, to make sure auto enrollment fits them best. There is a lot of people that auto enrollment will be a very great benefit for them. But people definitely on the higher rate attacks are people who have a company pension plan where the employers contributing, they should really review it. Right. And Thomas, I mean, people like you and people representing the pensions industry, I presume you're pointing out these difficulties with it. And are you getting any feedback? Yeah, it's mainly employers at the moment, they're asking the questions around this. And we've been asked almost on a daily basis how it's going to impact them. So like, what about the government? I mean, the point you made about the tax relief, for example? Yeah, they're being lobbied by the insurance industry all the time. So all the pension providers are in discussion with the government around that. So I do think these things will be ironed out over the next number of months. But that's why you're thinking it might kick in on the first of January. Yeah, well, we were originally meant to go if you remember the first of January, 2020, we're never the first of January 2025. And that's not far away at all. The one overarching point though, is that it's better than not having one at all, first of all, and secondly, the younger you start to pension with the compound interest element, the far better your final pension will be. Exactly. You're really trying to top up what the state pension has in place at the moment. We have an aging population. The state pension will be moved to a higher age in the future, whether it's next year or five years into the future, but it will happen. So if you can provide for a better income or a better standard of life, true a private pension, it is the way to go. And is it also fair to say that the earlier you start the better, but it's never too late to start a pension one way or the other without a shadow of a doubt, even if you're three, four years away from retirement, you should be getting advice around it. Because even if you're just building to get a tax free lump sum out of your pension or provide some type of income in retirement, you should be getting advice around pension. Right. Thomas, if it's got from first choice financial services in Limerick, we'll definitely podcast it, podcast this, and you'll definitely be invited back, I can tell you, as people suddenly went, oh, okay, and thank you very much. Thanks for your views, your news, your limerick today with Jonas, online 95.