People will work longer and less relief for higher earners, but the number with private pension cover will soar, writes DOMINIC COYLE
THE GOVERNMENT yesterday set down a framework for pension provision in the future that aims to ensure almost everyone has some level of private pension cover and that the cost to the State is contained. At its heart are provisions that will see people working longer before they receive a State pension, and higher earners receiving less pension relief than they have to date, although many will have more choice in how they draw down their pension. There will also be mandatory private pensions for hundreds of thousands of workers who currently rely solely on the State pension.
STATE PENSION
The framework reiterates the Government’s commitment to providing a State pension. It also states in the framework that it will aim to provide this at a level equal to 35 per cent of average weekly earnings. However, it is proposed to raise the age at which people will receive the State pension. This will happen in stages. In 2014, the State Pension (Transition) will be abolished, effectively raising the pension age to 66. This will be increased to 67 in 2021 and to 68 in 2028. The bottom line is that everyone currently under the age of 49 will not receive the State pension in Ireland until they are 68, while those now aged between 50 and 55 will have to work until they are 67.
There is also a fundamental change in the way entitlement to the State pension is calculated. Instead of the current system of averaging PRSI contributions over the working life, the framework sets down a new “total contributions” approach.
Basically, in order to receive a minimum State pension, a person will have to have accumulated 10 years of PRSI contributions in their working life. Thirty years of contributions will entitle a person to the maximum State pension on retirement.
The system, which is slated for introduction in 2020, will work proportionately, so people with 10 years’ contributions (520 PRSI payments) will receive a pension of one-third of the maximum rate. Each additional year of contributions will deliver one-thirtieth of the maximum pension, up to the maximum for 30 years of PRSI contributions.
People who reach “retirement age” but have not yet accumulated maximum PRSI contributions and wish to continue working will be allowed to postpone drawing down their State pension.
The framework also changes the way provision is made for people who take time out from the workforce to care for children or others in the home. From 2012, a system of credits will replace the existing range of “disregards”.
PUBLIC SERVICE PENSION
A new public service pension scheme is expected to be introduced later this year, provided the necessary legislation is in place. It will affect new entrants to the public service after that date.
Under the scheme, the new minimum pension age will be 66, with a maximum retirement age of 70. Special arrangements will be put in place for the Garda, the Defence Forces, prison officers and firefighters, who traditionally have shorter working lives. The pension will be based on “career average” earnings rather than on the public servant’s final salary.
In relation to the new scheme, the Government will consider the level of employee pension contribution. The current 6.5 per cent contribution will remain but it may apply to all pensionable pay in the future.
AUTO-ENROLMENT
Back in 1998, the National Pensions Policy Initiative set a target for occupational (private) pension coverage. It wanted up to 70 per cent of those in employment between the ages of 30 and 65 to have such cover. By 2008, the figure was just 61 per cent, up just two percentage points since 2002.
Among women and those under 30, the figures are even worse.
The Government has now decided to introduce “auto-enrolment”, or mandatory pension coverage. From 2014, assuming the economy has recovered, anyone over the age of 22 entering the workforce or changing jobs will automatically be enrolled in a pension scheme unless they are already a member of such a scheme.
People will be able to opt out after three months – and have their contributions refunded – but they will be re-enrolled again two years later. There is nothing to stop people continually opting out but the thinking is that inertia will see most people remain in the scheme once they are signed up.
Once a person has been a member of the scheme for more than six moths, they will no longer be able to have their contributions refunded even if they do opt out.
Minister for Finance Brian Lenihan said the scheme was designed to allow people to stop contributions at times of financial stress – such as unemployment, the early years of parenthood or home ownership – while still retaining their pension pot.
The Government is also moving to an SSIA-style “matching contributions” approach to tax relief on pension contributions under this auto-enrolment “soft mandatory” scheme.
Within income limits to be determined, the employee will contribute 4 per cent of their income and the Government will “match” this with a 2 per cent contribution. The employer will also contribute 2 per cent.
This means the State will effectively contribute €1 for each €2 put in by the employee, equating to relief of 33 per cent.
PRIVATE SECTOR PENSIONS
The Government has flagged its intention to rein in tax relief on pensions for higher earners for some time. The National Pensions Framework finally makes the move.
The matching funds approach being used in auto-enrolment will also apply to existing occupational pension schemes – both defined benefit and defined contribution.
And the level of that matching will be the same – €1 from the State for every €2 invested by the individual up to certain overall maximums and thresholds according to the age of the employee. This means a reduction in relief for those currently paying tax at the higher 41 per cent band but an incentive for those on the basic 20 per cent income tax limit. There will also be relief from PRSI and the health levies.
The Government has also announced a second major change for those holding defined contribution (DC) pensions – the introduction of more flexible drawdown arrangements. From 2011, this will effectively extend the use of Approved Retirement Funds – which allow pensioners to draw down their pension funds as they need the money – to all DC schemes.
The Government has also suggested a new approach for defined benefit (DB) schemes, many of which are in deeply underfunded. It suggests allowing employers and workers to fix the level of contributions and introduce flexibility on the benefits provided depending on investment performance – with regular reviews to assess the state of funding.
In the event of under- performance, benefits would remain static or fall but there would be scope to reinstate benefits where investment growth allows. However, these proposals are just suggestions at this stage.