Irish Times: Irish Life says savers do better under existing tax-relief regime (?)

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nest egg

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Spotted this in the IT today. https://www.irishtimes.com/business...benefit-of-auto-enrolment-state-contribution/
Perhaps those more learned than I can explain how the existing relief is better for standard rate payers than AE.

Comparing apples with apples in terms of the invested amount, AE is superior for those paying the standard tax rate, what am I missing?
AEStd Tax Relief (20%)
Investment€3.00€3.00
Top Up€1.00€0.75
Total Investment€4.00€3.75
Top Up %25%20%

Edit: Top up is 75c, rather than 60c, under standard tax relief, for the reason TI_30XA mentions below
 
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The analysis in the article is misleading in that it effectively assumes a greater € employer contribution match under the DC scheme than under AE.....and this is what is skewing the suggested conclusion. A €3 employee contribution under auto enrolment attracts a €3 employer contribution. But this employee contribution is an "after-tax" or net amount. This equates to €3.75 on a "before-tax" or gross contribution. So assuming a 1:1 matching comparator DC scheme where the net cost to the employee is the same as under the auto enrolment example, this would attract a €3.75 employer contribution (a substantial increase in employer contributions). So it's not an apples to apples comparison as the employer would be contributing a much higher amount in the DC example. It's not clear to me than an employer would default to this.....given the higher costs. So the maths and the suggestions in this article are in my view deeply flawed. It raises a bigger issue about vested interests in the pensions industry. Appreciate this is a fairly technical response but would be good if @Duke of Marmalade or @Colm Fagan or others could weigh in.
 
@TI_30XA thanks for the explanation - I hadn't considered the pre vs. post tax nature of the comparison. Given Irish Life are also struggling with this topic, I won't lose too much sleep over it! It does hammer home the difficulty many people are going to face when trying to make an informed decision about which scheme to take part in (for those who have a choice).
 
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TI_30XA said:
Appreciate this is a fairly technical response but would be good if @Duke of Marmalade or @Colm Fagan or others could weigh in.
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I've changed my mind a few times. I now agree with the ESRI who argued that the pension tax system is already complicated enough, without making it even more complicated, so AE should have been designed to fit exactly with the existing tax system for pensions (both relief on contributions and taxation of benefits). The matching employer contribution was enough of a sales pitch, without having to throw in the 1 for 3 government top-up, and the attendant complications.
The above discussion is proving my (and ESRI's) point. If experts are getting confused, what hope is there for the ordinary Josephine Soap?
I don't know whether it's too late to put the genie back in the bottle.
 
Can someone clarify the following please? As an employer, when AE comes in, do I have to give employees the choice between the AE tax relief system and the system that currently operates? My preference would be to have just the AE system in place as otherwise there would be extra time/effort/expense in operating/explaining 2 systems.
 
Wrote about this two years ago. If you are paying tax at 40%, you are better off under a company scheme. There is also the earnings cap of €80,000 to be taken into account, which will impact some (not the target market of AE) .


www.bluewaterfp.ie

Is the auto enrollment scheme beneficial for those paying income tax at the higher rate - Bluewater Financial Planning

One of the features of the auto enrollment pension scheme is that members will not get tax relief on their contributions. Instead, the State will make a top-up contribution to your pension pot and your own contributions will be deducted from your net salary (the payment amount will be calculated...
www.bluewaterfp.ie www.bluewaterfp.ie
 
Louisval said:
Can someone clarify the following please? As an employer, when AE comes in, do I have to give employees the choice between the AE tax relief system and the system that currently operates? My preference would be to have just the AE system in place as otherwise there would be extra time/effort/expense in operating/explaining 2 systems.
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To the best of my knowledge, if they're not in the existing scheme your employees will be shoehorned into AE, so you're going to be stuck with both unfortunately (I'm open to correction on this), unless you get everyone into the existing scheme beforehand (easier said than done).

This example highlights the extreme shortsightedness in having two systems for doing the same thing. The rationale of giving people who don't pay any tax an incentive to save for retirement is fine, but I'm stunned at how poorly thought through the solution they came up with is.
 
Thanks Steven and nest egg,

I tried to reply earlier but I think there's an enforced delay for new members.

I understand that higher rate taxpayers do better under the current system. The majority of staff that I will need to include in AE are likely to be basic rate tax-payers.

nest egg said:
To the best of my knowledge, if they're not in the existing scheme your employees will be shoehorned into AE, so you're going to be stuck with both unfortunately (I'm open to correction on this), unless you get everyone into the existing scheme beforehand (easier said than done).
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Maybe I didn't make myself clear. The employees that I will need to offer AE to are not in any pension scheme. I am just trying to confirm whether I have to make the current type scheme available to them in addition to the AE scheme? I suspect that this will not be a requirement - just looking for confirmation.
 
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No, you don't need to make an existing pension scheme available to all staff. Those not eligible will be enrolled in AE. If there is a waiting period to join the occupational pension scheme, you will have to enroll them in AE while they wait. Depending on how much the scheme contributes, having a waiting period may be more hassle (employer contribution will go up to 6% after 10 years.

Having two different taxation systems for two different types of pensions is an absolutely idiotic idea. I understand that they think the SSIA type credit it easier to understand but when it creates an unequal benefit for some, it is wrong.

Equalising down is also unequitable. Company owners can contribute as much as they want through company contributions, so won't suffer. Self employed, some of whom are unable to incorporate, will have lower relief and pay more tax...and they already pay a higher tax rate than anyone else with a total tax rate of 55% for anyone earning more than €100,000.
 
Steven Barrett said:
No, you don't need to make an existing pension scheme available to all staff. Those not eligible will be enrolled in AE. If there is a waiting period to join the occupational pension scheme, you will have to enroll them in AE while they wait. Depending on how much the scheme contributes, having a waiting period may be more hassle (employer contribution will go up to 6% after 10 years.

Having two different taxation systems for two different types of pensions is an absolutely idiotic idea. I understand that they think the SSIA type credit it easier to understand but when it creates an unequal benefit for some, it is wrong.

Equalising down is also unequitable. Company owners can contribute as much as they want through company contributions, so won't suffer. Self employed, some of whom are unable to incorporate, will have lower relief and pay more tax...and they already pay a higher tax rate than anyone else with a total tax rate of 55% for anyone earning more than €100,000.
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Unusual for Irish politicians to f**k it up !
 
Most people, including politicians, don't know the first thing about pensions, so I'd be of the view that Govt/Minster have been badly advised on AE by the DSP. Clearly there was a goal to ensure people who don't pay tax get an incentive towards their retirement, but in trying to solve that problem, they lost sight of the practicalities of putting a second system in place, alongside the existing one.

Where I would lay the blame with Govt, is not doing an acid test with employers before going hammer and tongs on the new AE approach.
 
Steven Barrett said:
No, you don't need to make an existing pension scheme available to all staff. Those not eligible will be enrolled in AE.
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Thanks Steven. That's what I had always understood until recently when a normally well-informed friend told me otherwise! Thanks for the confirmation. The idea of having some employees in AE and another group in a different regime would be problematic for all sorts of reasons. In addition to the difference in the tax relief on contributions, could you imagine, for example, if the rules of each regime don't change - as I understand it, one group could take their fund in full tax-free at retirement whilst the other group may have to take a lower lump sum, etc.? I certainly wouldn't want to be in the middle of such regulatory misalignment. If both regimes were made available, could you imagine the lengths you would have to go to demonstrate that employees had received the appropriate advice, etc.?
 
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Louisval said:
...The idea of having some employees in AE and another group in a different regime would be problematic for all sorts of reasons....
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Are you sure you won't end up in that situation? Any employees not in your existing scheme who are earning over 20k and aged between 23 & 60 will be auto-enrolled.
 
nest egg said:
Most people, including politicians, don't know the first thing about pensions, so I'd be of the view that Govt/Minster have been badly advised on AE by the DSP. Clearly there was a goal to ensure people who don't pay tax get an incentive towards their retirement, but in trying to solve that problem, they lost sight of the practicalities of putting a second system in place, alongside the existing one.

Where I would lay the blame with Govt, is not doing an acid test with employers before going hammer and tongs on the new AE approach.
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Ah yes, a bunch of people whose only experience of pensions is an unfunded DB scheme will know what to do
 
Hi nest egg,

In response a previous post of yours, I wrote this.

Louisval said:
Maybe I didn't make myself clear. The employees that I will need to offer AE to are not in any pension scheme. I am just trying to confirm whether I have to make the current type scheme available to them in addition to the AE scheme? I suspect that this will not be a requirement - just looking for confirmation.
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It was in relation to this cohort of employee exclusively that I'm enquiring about. I think Steven has answered my query.
 
Louisval said:
...in relation to this cohort of employee exclusively that I'm enquiring about...
Click to expand...

Louisval said:
...The idea of having some employees in AE and another group in a different regime would be problematic for all sorts of reasons. In addition to the difference in the tax relief on contributions...
Click to expand...

I get you now. Standing back though, it does appear like you will end up employees in both schemes, with the hassle which goes along with that. For simplicity, you may be better off trying to entice all your employees onto the one pension scheme regardless.
 
I know you are just trying to be helpful but wires are still a little crossed here. I don't have a scheme in place for employees currently! I don't want to set one up either.
 
Louisval said:
Thanks Steven. That's what I had always understood until recently when a normally well-informed friend told me otherwise! Thanks for the confirmation. The idea of having some employees in AE and another group in a different regime would be problematic for all sorts of reasons. In addition to the difference in the tax relief on contributions, could you imagine, for example, if the rules of each regime don't change - as I understand it, one group could take their fund in full tax-free at retirement whilst the other group may have to take a lower lump sum, etc.? I certainly wouldn't want to be in the middle of such regulatory misalignment. If both regimes were made available, could you imagine the lengths you would have to go to demonstrate that employees had received the appropriate advice, etc.?
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For the basic tax rate payers that you mentioned, they will get a better tax relief under AE than under a normal scheme.

But then, the contribution rate is 1.5% for AE initially. Practically useless.

The simplest thing to do from a management point of view is to have all staff in the one scheme.
 
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