I’m wondering if you could help me with a decision now that auto-enrolment is under way. I am in my mid-40s on €35k a year and therefore fall within the remit of auto-enrolment.
I think it’s a great idea and fully support its ethos. However, I have had a PRSA for the past 15 odd years and, while it hasn’t always been easy to keep it up, I have.
I am considering opting out of auto-enrolment completely and relying fully on my PRSA. In your opinion and with this limited information, do you think this is a good/worthwhile decision?
C.C.
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I can help but, ultimately, the decision has to be yours, not least as there are so many variables involved.
You find yourself in a bind for having done the sensible thing – taking out a personal pension at a time when one would not have been available to you in work. And, as you say, you have kept that going for 15 years through good times and bad to ensure that you make as much provision for your finances in retirement as possible.
And then along comes auto-enrolment. Finally. They’ve been talking about this sort of a workplace pension for over 20 years and you certainly made the right choice in not hanging around on the presumption it would be there in time to work for you.
Had you done so, you would have missed out on the investment returns and tax relief that you have enjoyed over what is close to half a working lifetime.
So what happens now?
Given that you are aged between 23 and 60 and that your annual income exceeds €20,000, you will have been signed up to My Future Fund, the name of the auto-enrolment fund.
You will have a chance after six months to step back but if you want to do so, you will not want to long-finger it as the window to opt out only stays open for two months – i.e. in this case July and August of this year.
In that case, any payments you have made will be refunded to you but your account remains open as the contributions from your employer(s) and the State remain invested. Two years after opting out, you will be automatically enrolled again unless you are at that time otherwise enrolled in an workplace scheme, and so the cycle begins again.
But should you opt out?
As of now, you are doing all the heavy lifting. Yes, you are getting tax relief on what you put into your PRSA but you are getting no support from your employer(s).
Under auto-enrolment, those employers will be obliged to contribute to your retirement income. Initially, their contribution (like yours) will be a modest 1.5 per cent of your gross pay but that will rise over time – to 3 per cent from 2029, 4.5 per cent from 2032 and 6 per cent from 2035.
And the State will also put in €1 for every €3 you contribute.
As a general rule, I am against turning down free cash from my employer and/or the State. And, more importantly, this does not have to be an either/or scenario.
As long as you are paying personally and directly into your PRSA, there is nothing to stop you continuing to do so while also paying separately under auto-enrolment. And if the auto-enrolment contribution causes a financial squeeze, you can simply pull back slightly on the amount invested in the PRSA until things get more comfortable.
Essentially for every €3 you invest in My Future Fund, you are getting an additional €4 between the employer(s) and the State. That’s a 133 per cent gain on your investment even before you look at any investment return.
Yes, there is a cap on how much you can invest in pensions while availing of tax relief and you will want to make sure the amount going into the PRSA and My Future Fund do not exceed this but those limits are fairly generous.
Under the age of 30, you can invest up to 15 per cent of your gross salary into a pension. That figure rises to 20 per cent in your 30s and 25 per cent in your 40s. When you hit 50, it goes up again, to 30 per cent, and to 35 per cent from the age of 55. Anyone over the age of 60 can invest up to 40 per cent in their pension.
There is an upper salary limit – €115,000 – but that does not concern you.
Assume you are mid-40s and earning, as you say, around €35,000, you can invest up to €8,750 a year in your pension. Good luck to you if you are but few manage to top out their limits in which case they should certainly be able to afford €525 a year that auto-enrolment will entail, at least initially.
I am presuming in all this that you pay into your PRSA yourself directly rather than having those contributions deducted through your employer’s payroll. If the PRSA is paid through payroll, you would be considered to have occupational cover and would not have been signed up to auto-enrolment.
In fact, you could not join auto-enrolment even if you wanted to in those circumstances.
The bottom line is that it appears to make sense to stick with auto-enrolment alongside your PRSA, even if that involves trimming back slightly on your PRSA contributions but, as I said initially, it really has to be your decision.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email todominic.coyle@irishtimes.comwith a contact phone number. This column is a reader service and is not intended to replace professional advice
