The My Future Fund national auto-enrolment pension scheme is now a reality. But many employers will continue to offer their own schemes alongside the State offering. The question for many job candidates and existing employees will be how to choose between the two. And it may not be all that simple. –
The My Future Fund scheme will apply to all employees between the ages of 23 and 60 who are earning over €20,000 a year and not already in an occupational pension scheme. It will be phased in over a decade, with employer and employee contributions each starting at 1.5 per cent and increasing every three years by 1.5 per cent until they reach 6 per cent each by year 10. The State will top up contributions by €1 for every €3 saved by the employee. That State top-up is designed to compensate for the lack of tax relief on employee contributions.
Employees will be able to opt out after six months but will be automatically reenrolled after two years. That process will repeat every two years in the hope that employees will eventually choose to remain in membership for the long term.
Recent media reports have claimed that some employers are attempting to induce employees to sign up to workplace schemes that might be inferior to My Future Fund. The Government’s response has been to indicate an intention to regulate for a minimum standard of occupational scheme that qualifies as an alternative to the State option – in this case a minimum contribution level of 3.5 per cent of the employee’s salary.
RM Block
So far, so fair enough. However, with contribution rates set to increase in two years’ time, will that 3.5 per cent level also be subject to change? That’s just one element of the issue.
“Even if an employer matches the auto-enrolment scheme, it will not necessarily be the same for all employees,” notes Ashling O’Neill, a certified financial planner with Clear Financial. “If two people working in the same company are paying different rates of tax the employer would have to adjust contribution levels to ensure that the lower-rate taxpayer is not disadvantaged.”
She explains that with My Future Fund, the State contribution is equivalent to tax relief at 25 per cent. However, occupational scheme members get full tax relief on their contributions, so a higher-rate taxpayer will benefit from relief at 40 per cent.
“Higher-rate taxpayers will generally be better off,” she says. “That should be taken into consideration when deciding between one scheme and another.”
Even when the occupational scheme appears clearly superior, that may not always be the case, O’Neill adds. “An employer could be matching employee contributions of between 3 per cent and 5 per cent at the moment. That means total contributions could amount to 10 per cent of an employee’s salary. That’s a lot better than the 3.5 per cent My Future Fund starts out at. But in six years’ time My Future Fund will be 14 per cent, including the State contribution – significantly above the occupational scheme level. Employees need to check if their employer intends to at least match the State scheme as time goes on.”
Bernard Walsh, head of investments and pensions at Fairstone Ireland explains that there are other factors to take into consideration as well. “Employees and job candidates need to look at the full package on offer. There are some employers who provide life cover integrated into the company pension scheme. That might affect your thinking. Read through everything that’s on offer in the company pension scheme before making up your mind. There is no option to integrate other benefits into the auto-enrolment scheme.”
He also points to the very limited investment fund choice available through the State scheme. “If you are talking about small amounts of money in the early years this is maybe not such a big deal,” he says. “But it could become an issue over time, and you won’t be able to transfer your funds out of the auto-enrolment scheme.”
Members won’t be able to make additional voluntary contributions either, and this may also be an issue later on.
O’Neill points to the lack of professional advisory services available through My Future Fund as a potential deal breaker. “The auto-enrolment scheme is setting a floor,” she says. “That’s a good thing, but there is no financial guidance or professional support for members. If the company scheme has the same contribution rates but also has education and advisory services and financial-planning support, it is the one to choose.
“Also, higher-rate taxpayers should not go into the auto-enrolment scheme if the occupational scheme at least matches the contribution level.”
