Pension reform calculation for 23 year old on €30k adds up to €600k

One of the biggest pension reforms in the history of the State was announced this week with the publication of the Automatic Enrolment Retirement Savings System Bill 2024. The Bill, which will be brought to the Oireachtas, will pave the way for around 800,000 workers to be brought into a pension scheme for the first time. If passed, as expected, then from January, workers will be automatically enrolled in a pension, topped up by employers and the Government. EY Ireland tax partner MICHAEL ROONEY explains.

So what is auto-enrolment?

It is a new pension savings scheme for employees who are not currently paying into a pension. From next year anyone earning over €20,000, between the ages of 23 and 60, would be automatically entered into a workplace pension scheme.

Is it a good thing?

[Employees] will benefit from contributions from their employer and the Government. Moreover, they will benefit from what Albert Einstein called the ‘strongest force in the world – compound interest’. Contributing year after year, and seeing the pot [grow]. Systems such as this are commonplace and very successful in many countries, including the UK and Australia.

Can workers opt out?

People can opt out after six months. Evidence from other countries, however, show that most people stay in a pension scheme once they start contributing.

What will happen from January (if the legislation is passed)?

Part of your pay-cheque [starting at 1.5%] will go into your pension [if you qualify]. Employers will be obliged to pay the same amount as workers and, on top of this, the State will contribute €1 to every €3 put in by the employee.

Therefore, the €675 contributed by an average worker in year one will end up as €1,575 due to employers matching and Government contribution. These contributions will gradually increase over time.

What does this mean for our pockets?

We looked at a couple of different scenarios* and in each there is a really clear benefit if you are not already a member of a workplace pension scheme. We found:

■ Aged 23, based on a starting wage of €30,000, the total pension pot at 66 would be €599,546, which is 5.5 times the employee’s contribution.

■ Aged 38, based on a starting wage of €47,200, the total pension pot is €344,166 – almost four times the employee’s contribution.

What will we pay?

The amount you pay will be a set rate of your annual salary. Your employer will match your contributions and the Government will contribute an additional amount. You and your employer will pay 1.5% of your annual salary in the first year. That will rise to 3% from the third year on, 4.5% from year six on, topping out at 6% from the 10th year onwards.

Is there a limit?

You can still contribute but your employer or the Government won’t match your contributions on any income over €80,000 gross annual salary.

*Assuming 2% wage growth each year, an average of 4.5% return on the investment and a retirement age of 66.