29 June 2018
    
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Quintas Newsletter
Introduction
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The Generation Game
Tax Bites
Pension Changes
Personal Insolvency News
University of Life
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Pension Changes
by Paul O'Connell, Partner
 

Employers take note. A major shake up of pensions is on the way and is expected to be ready for roll out by 2022.

The Government has announced plans to introduce an auto-enrolment pension scheme in 2022 that will see workers without a private pension being automatically enrolled into a State-sponsored pension scheme, with the intention to have it funded by both the employee and the employer.

Whilst the Government hasn’t yet published the full details of how the scheme will work, it is anticipated that it will cover employees over the age of 23 who earn more than €20,000 per annum and who don’t yet have a private pension.

The exact amount to be contributed by the state, the employee and the employer has yet to be determined. An illustration in the Government report suggested an eventual position where employees and employers would each contribute 6% of pay with a 2% contribution coming from the state.  It is anticipated that it will take some time to reach that level of funding.  Initial contributions are likely to start lower and will be increased over a period of time.

Another impact of the introduction of an auto-enrolment pension scheme could see higher rate taxpayers lose out on an element of tax relief once the new scheme commences. The Government has flagged that it may move away from a tax relief basis to a contribution basis that could see a contribution of €1 for every €3 paid into a private pension scheme. Were this to be implemented, the value of the state contribution would be around the 33% mark compared to the potential 40% tax relief currently available on pension contributions. Those paying the lower rate of tax of 20% and availing of the state contribution could end up better off under the new system.

Some taxpayers could also be at a disadvantage when it comes to drawdown of their pension upon retirement. Those with a larger pension pot could end up paying the higher rate of tax (currently 40%) even though the matched funding could have been a lot less at a universal rate of 33% or less. This will only impact on you if your income is at a level where you are taxed at the higher rate.

With auto-enrolment on the way it might be wise to review your pension funding so as to maximise your benefits before it arrives.