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5 reasons why you shouldn’t auto-enrol and opt for a private pension instead

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Retirement planning is a crucial aspect of securing your financial future, and the government’s auto-enrolment scheme is designed to make it easier for employees to save for retirement.

This initiative, set to be introduced in the second half of 2024 in Ireland, aims to address the looming pension crisis and encourage workers to build their retirement savings.

While the idea behind auto-enrolment is commendable, it’s important to consider whether it’s the right choice for you.

In this blog post, we’ll explore what auto-enrolment is, when it’s being introduced, and five reasons why you might want to think twice before your employer automatically enrols you in it.

What is Auto-Enrolment?

Auto-enrolment is a government initiative aimed at encouraging employees to save for retirement. The scheme is set to address the growing gap in the pensions budget, which, if left unaddressed, could jeopardise the financial security of Ireland’s aging population in the coming decades. Notably, Ireland is the only OECD country without some form of auto-enrolment, and it’s estimated that over 750,000 people will be eligible for this program.

How Does Auto-Enrolment Work?

Auto-enrolment is scheduled to launch in the second half of 2024. Eligible employees who are not currently enrolled in a private pension (Defined Contribution) scheme that are earning over €20,000 per year, will be automatically enrolled. Membership is compulsory for the first six months, after which individuals can “opt-out.” Those who opt out will be automatically re-enrolled after two years if they remain eligible.

Employers will play a significant role in the process. They must facilitate the enrolment of eligible employees, deduct pension contributions from their salaries, and make matching employer contributions. The State will also contribute, starting at 0.5% and gradually increasing every three years. By year 10, total annual contributions will reach 14%, with employer and employee contributions each amounting to 6%, alongside a further 2% from the State.

Despite the benefit auto-enrolment offers to hundreds of thousands of retirement savers, it has its limitations. Read on to consider five reasons not to auto-enrol, and opt for a private pension instead.

1. Auto-enrolment offers less flexibility than a private pension

Auto-enrolment offers limited flexibility when it comes to member contributions and fund choice. The government determines member, employer, and state contributions, reaching a cap at Year 10. Additionally, auto-enrolment will only provide four fund options, which are chosen on your behalf. In contrast, private pension plans allow you greater control over your contributions and a wider range of investment options to help you reach your financial goals sooner.

2. Auto-enrolment is less attractive for higher earners than a private pension

From a taxation perspective, auto-enrolment may be less attractive to higher-income earners. In a private pension, members pay no income tax on their contributions, up to a certain limit. Higher-income earners paying the top rate of 40% can claim back an equivalent amount, meaning the State reimburses €40 for every €100 contributed to the pension. While auto-enrolment offers a 33% State contribution, those paying tax at a 20% marginal rate will receive only €20 back from the State for every €100 contributed, which is less favourable than what private pension members receive.

3. Auto-enrolment does not allow lump sum contributions

Under the auto-enrolment scheme, members cannot make lump sum contributions (also known as Additional Voluntary Contributions or AVC) to their retirement savings. In contrast, private pension plans allow members to make AVCs, which when made before the annual tax deadline allows the member to claim tax relief at their marginal rate. It also means private pension holders can watch their lump sum investment grow tax-free.

4. Financial advice and guidance is not provided to auto-enrolment members

There are no plans for auto-enrolment to offer financial advice and guidance to members. This means if you’re seeking specialist advice on managing or growing your pension investment or are coming up to retirement and want to develop a strategy to maximise your savings, you’re on your own. Private pension holders, on the other hand, have greater access to expert advice and guidance through face-to-face or video meetings with financial experts, giving them peace-of-mind about their retirement goals.

5. Auto-enrolment offers limited control over retirement age

One significant drawback of auto-enrolment is that you have limited control over your retirement age. Access to your auto-enrolment fund is only permitted at the government-set retirement age, which could be 68 or more by 2040. In contrast, private pension members may have more flexibility, with the option to retire as early as age 50, depending on the terms of their plan. Auto-enrolment funds are locked until age 66, but this may change based on the government’s approach to raising the retirement age.

Talk to a financial expert to find out what retirement savings strategy is right for you

While auto-enrolment aims to promote retirement savings and address Ireland’s pension challenges, it may not be the best fit for everyone.

Private pension plans offer greater flexibility, tax advantages for higher earners, lump sum contribution options, access to expert guidance, and control over your retirement age.

When considering your retirement savings strategy, carefully evaluate your individual financial circumstances and long-term goals to determine which option aligns best with your needs and aspirations.

The financial experts at Hennelly Finance specialise in helping people save for a comfortable and enjoyable retirement.

Get in touch with a member of our team to find out more about your pension options, and what strategy is right for you.

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