Will auto-enrolment fund a good retirement?
There are limits on the contributions that can be made into auto-enrolment pensions – and in turn, the extent to which AE alone can be relied on to provide a sufficient income in retirement.
Looks like our landmark auto-enrolment (AE) pension scheme is proving successful in encouraging people to engage with retirement planning. Recent research finds that more than eight in ten workers who were automatically enrolled in My Future Fund had no plans to remove themselves from the scheme during the recent opt-out window.
The survey of 1,000 adults nationwide commissioned by Ask Acorn, a nationwide network of financial advisers, and carried out by IReach, looked at whether enrolled workers would choose to stay, pause or leave My Future Fund during the first opt-out period for those who joined on January 1st. That window opened on July 1st and closed at the end of August.
Some 84% said they would remain in the scheme, while 14% said they would pause contributions. Of the 16% of workers who said they were planning to opt out, half planned to redirect contributions to a private pension.
People aged 25 to 34 showed the strongest commitment, with 89% planning to stay enrolled. Just one in ten in this group considered opting out.
According to experts at Ask Acorn, the scheme has achieved its primary objective of getting workers to think about their long-term financial future, and that the next step is helping people to understand whether auto-enrolment alone will be enough to deliver the retirement they want.
"While it's still early days,” says Keith Butler of Ask Acorn, “these findings point to a strong initial vote of confidence in auto-enrolment and the role it could play in improving long-term financial security. It's particularly encouraging to see such high participation among younger cohorts, who stand to benefit the most from starting early.” That’s the good news. Auto-enrolment is not however a silver bullet. It won’t solve all our pension issues.
Another study released around the same time found that 81% of workers eligible for AE don’t think it alone will be enough to provide for their retirement. And of those, one in three believe their AE pension alone will be ‘nowhere near enough’.
This is according to the findings of a separate Ask Acorn survey.
The survey looked at how sufficient a retirement income those eligible for AE expect the state-backed pension system to deliver.
Keith Butler says that while AE is one of the biggest reforms in Irish pensions in decades and has real potential to address this country’s pension coverage gap, there are limits on the contributions that can be made into AE – and in turn, the extent to which AE alone can be relied on to provide a sufficient income in retirement.
“This is borne out by the results of our survey, with the vast majority of those eligible for AE feeling that My Future Fund alone would not be enough to provide for their retirement. This is encouraging as it shows that most Irish people understand the restrictions of AE and are under no illusion about the retirement income that the scheme can deliver.”
Headline findings from the survey reveal that, of those eligible for AE, only 19% think it will deliver a sufficient income in retirement, with men more likely than women to hold this view.
The older you are, the less inclined you are to think contributions to AE alone will be sufficient to provide for you in retirement. Those aged 55 plus are least inclined to believe contributions will be sufficient, with less than one in ten of this age group holding this view.
The youngest age group (18–24-year-olds) were the most inclined to believe that AE alone will provide a sufficient retirement income, at one in three (32%). Interestingly, at 25%, the second most likely age group to believe that AE would provide a sufficient retirement income are 35-44-year-olds.
Almost half (47%) said that while AE will help, it will not be enough on its own to provide for them in retirement. This is most strongly felt by those aged 25-34, where 55% of this age group expressed this view, followed by those aged 55 plus (49%).
Those most likely to believe that the retirement income provided by AE alone will be ‘nowhere near enough’ include women and those over the age of 35. Almost four in ten (38%) women hold this strong view compared to around one in three (31%) men. And overall, four in ten of the over-35s feel the same.
Under AE, both employee and employer contributions are set as a percentage of earnings, rising from 1.5% to 6% over the first ten years. Employee contributions are topped up by the State at a rate of €1 for every €3 you pay in – effectively a 25% supplementary boost.
AE does not allow flexibility in contribution rates, so neither employees nor employers can contribute more or less than these set percentages. Moreover, employer and state contributions are capped at €80,000 of annual salary.
“If you want to save more than the AE contribution limits,” says Mr. Butler, “you can’t do so within AE itself, but this doesn’t mean that AE won’t work for you or help boost your income in retirement. For many workers with no company pension on the table, AE can be a key part of their pension mix and something they can supplement with a personally-owned pension and the state pension, assuming the state pension will be still in operation when they retire.”
He points out that it’s important to carefully weigh up the scheme and decide if it’s going to form part of your long-term plans or not, or if you need to supplement AE with other pensions savings.
Where you stand on tax relief also needs to be borne in mind. If you are a higher rate taxpayer, you may benefit more from the tax relief available on private pensions such as Personal Retirement Savings Accounts (PRSA) or personal pensions, compared to the state top-up under AE. With a PRSA or personal pension, you receive tax relief at your marginal rate - currently 40% for higher rate taxpayers - on your contributions.
This can make private pension options particularly attractive if you wish to contribute more than the fixed AE limits.
“For some, AE will be a good fit,” says Mr. Butler, “but for others, particularly those with different income levels, career paths or retirement goals, the contribution levels under AE may not fully meet their desired retirement income targets. It’s also important for auto-enrolled workers to understand that the type of pension delivered by AE will depend on how well the money is invested as the investment performance of contributions to My Future Fund will have a big bearing on how well AE will deliver for people come retirement.”
