The long talked about Auto-Enrolment (A-E) pension scheme is finally set to launch in September 2025, and will be a significant change for small business owners and the self-employed people in particular. Here’s what you need to know:
What is Auto-Enrolment?
Auto-Enrolment is a government-led initiative aimed at increasing pension savings. Under this system, employees without an existing occupational pension will be automatically enrolled in a state-supported scheme, with contributions coming from the employee, employer, and the government.
Who is Affected?
The scheme targets employees aged 23-60 who earn over €20,000 annually and are not currently part of a workplace pension. While it is mandatory for employers to enrol their eligible employees, self-employed individuals will have the option to participate voluntarily.
How Does It Work?
- Employee Contributions: Workers will contribute 1.5% of their salary. This will gradually increase to 6% over 10 years.
- Employer Contributions: Employers must match the employee’s contributions, so 1.5% of their salary, rising to 6% in 10 years.
- Government Contributions: The state will provide an additional top-up of €1 for every €3 the employee’s contributes.
- Investment and Management: The funds will be managed by approved pension providers, with multiple investment options available.
Can Employees Opt out?
While it is mandatory for employers to enrol eligible employees, those employees can opt out of the scheme after 6 months. In this instance, the employee will be refunded their contributions, however the employer and the state will not, which is a financial hit for businesses if staff opt to leave after 6 months. To mitigate this risk employers should consider formalising pension arrangements now under their company’s Group PRSA/Other scheme, and attach clear terms and conditions for employer contributions.
Note that the employee will have to be re-enrolled again every 2 years, and again opt out after 6 months if they wish.
What if you already pay into a pension?
Where an employee is clearly paying into a pension scheme via their payslip, they do not need to be enrolled, and can continue with their existing scheme.
What Does This Mean for Small Businesses?
For small business owners, Auto-Enrolment introduces additional responsibilities, such as ensuring compliance with contribution requirements. Employers should prepare by reviewing payroll processes and seeking financial advice if necessary. It is intended for the system to operate similarly to the current PRSI system.
Important Notes:
- Auto-enrolment will not replace the state pension. It is designed to provide private pension savings for employees who do not currently have any.
- Where you have an existing pension scheme, and an employee has opted into it, they do not then need to be enrolled in the A-E scheme
- Where an existing scheme exists, there is currently no requirement for an employer to be contributing to the scheme.
- For employees paying the marginal rate of tax (earning over €44,000 p/a), tax relief in an employer scheme is 40%, whereas the state top up in A-E is only 25%. It is important your employees understand this.
- In A-E, the contributions are set at 1.5%. This is fine for younger employees with 30-40 years to retirement, but more senior staff who have not yet contributed to a pension would need to contribute more than this to have a meaningful pension pot at retirement.
Key Takeaways
- Auto-enrolment will not replace the state pension. It is designed to provide private pension savings for employees who do not currently have any.
- All employers will have to auto-enrol employees who are deemed eligible (those aged between 23 -60 and earning over €20,000 p/a)
- Employers will have to contribute 1.5% of the employee’s salary into the pension
- Employers should consider formalising pension arrangements now under their company’s Group PRSA/Other scheme so that they can keep control over their pension contributions.
- The state tops up the employees contribution by 25%, i.e. €1 for every €3 the employee puts in.
- If there is an existing employer pension scheme, and the employee is paying into that via payroll, they do not need to be enrolled in the A-E scheme.
- It is worth seeking pension advice for both your business and your employees, as there is a lot to be considered with the introduction of this new scheme.
