SSIA-style State pension top-up under consideration for auto-enrolment scheme

Large numbers of people rely solely on State pension for retirement income

Pension tax relief is offered at 20 per cent or 40 per cent, depending on earnings, while the State-top-up wold be equivalent to tax relief of 25 per cent.

An SSIA-style top-up from the State is being proposed as part of a pensions auto-enrolment system currently being designed by the Government.

The outlines of the system were due to be considered on Monday by the Cabinet Sub-Committee on Economic Recovery on the basis of proposals from Minister for Social Protection Heather Humphreys.

A Special Saving Incentive Account (SSIA)-style top-up from the State as part of a system which would automatically enrol employees into a pension would be different from the tax relief incentives currently offered to pension savers.

Many in the pensions industry have argued for the auto-enrolment system to operate on the basis of tax relief, but the current proposal argues that a State-top up is easier to communicate and will operate well for lower earners with little income tax liability.

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Role

The proposals also see a central role for Central Processing Authority (CPA), housed in the Department of Social Protection, which will collect the funds and hire four fund managers to invest them. This is understood to be a more central role for the authority than previously envisaged.

If the Cabinet Sub-Committee approves the outlines of the plan it is likely to be brought to Cabinet before Christmas by the Minister.

An original deadline of 2023 to introduce pensions auto-enrolment has already been shelved, due to the pressures of Covid-19. It is not clear what the new timeline would be, but sources say it would to likely be 2024 given the amount of work to finalise the system and to give employers and payroll system providers time to adapt.

Around 55 per cent of employees have supplementary pensions provision and this falls to 35 per cent in the private sector, meaning large numbers of people rely solely on the State pension for retirement income. Under auto-enrolment, an employer would be obliged to offer a pension plan to an employee, who would be automatically signed up.

Employers who currently offer their own pensions can continue to do so, with the scheme designed to apply to those who currently have no scheme in place and earn more than €20,000 a year. Employees could opt out, after a period.

Under the proposal, employers would match the contribution of employees and the State would top up the employee contribution. Eventually the employer and employee might both contribute 6 per cent of salary, with the State providing a 2 per cent top up.

Cost

However, given the cost of this to the employer and employee a lengthy phase-in period is expected, with auto-enrolled contributions starting at a much lower level and gradually rising.

The Minister said in the Dáil recently that the phase-in period could last as long as a decade.

Handling the scheme as an SSIA-style top up may make it easier to facilitate lower paid employees with limited income tax liability. However, the pensions industry may argue that it brings a new layer of complexity to the system and a consultation process on the issue say concerns about how a State top-up wold interact with existing marginal tax relief.

Currently tax relief is offered at 20 per cent or 40 per cent, depending on earnings, while the State-top-up wold be equivalent to tax relief of 25 per cent.

Cliff Taylor

Cliff Taylor

Cliff Taylor is an Irish Times writer and Managing Editor