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What is an auto-enrolment pension scheme and why do we need one?

22/12/2017 Posted by IAPF | Comments(0)

Like most developed countries, Ireland has an ageing population with people living longer, and lower birth rates.

A recent report found that while almost 100% of public sector workers are in a pension scheme, only approximately 40% of private sector workers have their own pension.

So, 60% of private sector workers will be wholly reliant on the State pension to provide for them financially when they reach retirement age.

The State pension is designed to keep people out of poverty but will not be enough to enable most people to have the lifestyle they imagine in retirement.

Because the State pension is paid for out of current taxes, the combination of an increasing population of older people and a decreasing population of younger people will put pressure on its sustainability.

This is basically a pension time bomb that is going to explode in 20 years – unless we do something about it now!

It is often assumed that the core reason for not taking out a pension is affordability, but it is not that simple. There are lots of reasons, including a deep lack of understanding of how pensions work and how important they are, coupled with an element of mistrust in a pension system so complex that even the experts struggle to get their heads around it.

One of the most popular solutions to the pension problem in other countries, and something that the Government has been working on for some time now, is an “auto-enrolment” savings scheme.

How these schemes work is that all workers, who are not already in one, are automatically enrolled in a pension scheme. People are then given the option to “opt-out” after a certain amount of time, but experience in other countries has shown that most people remain in the scheme.

The beauty of these schemes is that workers, their employer and the State all contribute - so no-one carries too much financial pain.

So how would it impact the average worker? The minimum age for participants would likely to be set at around 22. In terms of what people pay, it is usually a set percentage of an individual’s salary.

It has been suggested that the employee “contribution rate” would start from 1% to 5% of the workers income with the employer and State adding to that.

If we follow the lead of other countries, they’ll probably start low and rise as we get used to them.

Is it a good idea? Yes, probably. Because the alternative is a crippled State cheque book and/or very many impoverished retirees.

 

http://www.dublinlive.ie/news/business/what-auto-enrolment-pension-scheme-14075302 

 

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