Jill Kerby

WORKERS AND EMPLOYERS: WILL THEY BE READY FOR PENSION AUTO ENROLMENT?

Last week, the government finally published its proposal for an auto-enrolment pension plan with a 2022 target date. It it goes ahead it will mean that the c65% of private sector workers who have no pension savings other than the State Pension will be on their way to building their own, work-based nest eggs.

Four years is a tight deadline, so good luck on that front. Yet everyone acknowledges that pension coverage is still falling and how as the population ages, future generations cannot count on the €12,650 State Pension to meet their retirement needs.

This new auto-enrolment pension is therefore aimed at the c410,000 workers between the ages of 23-60 who earn between €20,000 and €75,000, but do not belong to a company scheme or have a private pension like a PRSA. 

The new scheme is compulsory for employers, but not for workers who will be able opt-out with seven months of their auto-enrolment.

So how will it work?

From 2022, the worker and their employer will contribute 1% of the worker’s gross salary in that first year to their new pension fund.  This contribution will go up 1% each year until year six, when worker and employers will each be paying 6% of gross salary, or a total of 12%, into the fund. Meanwhile, for every €3 the worker contributes, the government will pay in €1. This works out as an additional 2% of their salary.

(Currently, private pension contributions result in 20% or 40% income tax relief depending on whether they you pay tax at the lower or higher rate. For every €100 saved into their pension, the 20% taxpayer will pay €80 and the 40% taxpayer, €60. Employers can also claim tax relief. Under this new system, the government’s 1:3 contribution will the equivalent of a flat 25% income tax credit, regardless of their earnings.)

By the end of the six year roll-out period, by 2027-28, the target of 14% of the employees gross salary as a total pension contribution will have been met. This is the annual percentage that pension experts suggest is the level needed to provide an income that is about 50% of the worker’s final salary when added to the State Pension.

So how much will each of the parties end up contributing each year for those first six years of the scheme?

Let’s use two examples:  a worker who earns €25,000 a year and one who earns €50,000, and let’s assume for simplicity’s sake that their income stays at that level.

In year 1, the worker and employer will each contribute 1% of gross salary, or €250. The state will contribute €62.50. The total contribution is €562.50.

In year 2, the annual contributions rise to 2% or  €500, €500 and €125 respectively.  In year 3, the contributions rise to 3% or €750, €750 and €187.50.  In year 4 they rise to 4% of gross salary or €1,000, €1,000 and €250, and in year 5 to 5% or €1,250, €1,250 and €312.50 respectively. 

By year 6 (and subsequent years) the worker and employee will each be contributing 6% of gross salary – 12% in total - or €1,500 + €1,500 and the state €375, or 2%. This amounts to a total annual contribution of €3,375, or 14% of salary. 

At the end of those first six years, a total of €11,812.50 worth of salary contributions will have been put into the worker’s fund. This figure doesn’t include any potential growth in the fund.

For someone earning €50,000 a year, you just have to double all these figures: in the first year the worker and employer will each pay in 1% of salary or €500 and the state just €125 (ie €1 for every €3 the worker contributes). But by year six, the worker and employer will be each contributing €3,000 each and the state, €750 for a total of €6,750.  This too amounts to 14% of gross salary.

At the end of year six, a grand total of €23,625 worth of pension contributions will have been invested in their auto-enrolment fund.

There are going to be lots of political and financial stumbling blocks before the final plan is launched. Unions, employers and the Department of Finance will all have to reach agreement. A new agency, the Central Processing Authority, will have to be set up, funded and the proposed four plan providers mentioned will have to agree to keep their costs to just 0.5% per annum.

And the tax relief anomaly will have to be sorted out. This pension scheme will only provide a flat 25% government subsidy, yet existing personal pension schemes like the PRSA, awards 40% tax relief on contributions on earnings of more than €34,500.

There’s still much detail to be thrashed out. Or watered down.

(Letters to jill@jillkerby.ie  The TAB Guide to Money Pensions & Tax 2018 is available in all good bookstores. See www.tab.ie for ebook edition.) 

PARENTS STILL STRUGGLING TO PAY FOR ‘FREE’ EDUCATION

Parents are preparing for the imminent return of their children to school and college. New uniforms are being bought, school books are being salvaged and recycled or a new set are being bought for children moving up a grade.  (The Department of Social Protection has allocated nearly €50 million this year for the means-tested Back to School Clothing and Footwear allowance.)

Family budgets are also being scrutinised, especially in an effort to find the €100-€200 worth of ‘voluntary contributions’ parents are expected to hand over – described to me by one neighbour with three small children recently as “the educational equivalent of mafia protection money – pay up or else”.

Junior education budgets, which were cut after the crash are rising slowly, but not quickly enough to meet the catch-up required for new school infrastructure, restoring post 2011 teacher’s pay to parity, hiring more teachers.

Our primary and secondary funding problems, for anyone who cares to look, have been measured by the OECD and are in a Department of Education and Skills report, Education at a Glance 2017, OECD Indicators.

The figures are based on 2014 data, but Ireland underfunds and/or is middle of the expenditure rank, coming 19th out of 32 countries for primary education spending per student; 16th out of 30 for lower secondary students; 14th out of 32 for upper secondary students and 16th out of 31 for third level spending.

In 2014, our total spend on education was 4.8% of our gross domestic product (also the OECD average) but was we allocated 12.9% of total government spending to education compared to the OECD average of 11.9%.

One big difference between Ireland and other OECD countries, is the amount we pay teachers. Teachers salaries account for an average 62% of most OECD countries’ education budgets; here they account for c71% of the budget allocation. Meanwhile, we allocate much less than the OECD average for non-teaching staff at primary and second level: 11% and 9% of our budget respectively compared to 16% and 15%.

Which brings me back to how to reduce the costs that parents have to allocate to their children’s education or pre-education care (“an extra mortgage” according to my neighbour.) 

Everyone wants well-paid teachers and support staff in our schools. We want attractive, up-to-date school classrooms and decent books and gym equipment, music rooms and science labs and a budget for extra curricular events and outings.

Is this going to happen for every school, anytime soon? No.

So here are a few random, practical ideas that emerged over coffee and carrot cake during a recent conversation I had in my back garden with my neighbour. We’ll leave the costings to the Ministers for Education and Social Protection:

-       A properly state-sponsored and co-funded crèche system with appropriate, proper, civil-service salary scales for crèche workers, that charges a scale of fees based on income and family size… like in so many other OECD countries. 

-       Instead of the “daft” €1,000 ‘Granny Grant’ idea – which could cost c€200 million according to some reports – how about an income tax deduction for a maximum of three years for parents with children in authorised crèches.  In an effort to avoid fees being raised, parents who use crèche operators who raise their fees by more than say c5%per annum will not get the tax deduction.

-       Ireland needs more children if we are to meet the cost of state services like education, health, pensions in 2050. So from 2020, first time parents get a tax-free baby bonus of €1k, €2k when they produce child number two, €3k for child three and €4k for child four or for a set of twins. Tax-free Child Benefit payments end with child number four; CB payments for subsequent children become taxable.

-       Mandatory school uniforms in state funded schools are abolished, saving the €50 million a year. Schools are encouraged to introduce a universal classroom uniform: clean jeans/tracksuit bottoms, coloured plain short/long sleeved t-shirts (no logos, pix, lettering), runners and plain shorts for PE.

-       All schoolbooks and copies are provided free. A €50 refundable deposit applies when returned in good condition at year-end. Books are recycled until they wear out or the curriculum changes.

-       A nationwide, adopt-a-school Angels pilot project is launched with corporate and individual ‘angels’ funding (to start) the most deprived/needy schools. Angel donations replace the hated ‘voluntary contribution’ payments that pay for many teaching materials, activities, repairs, etc not covered by the state allocation. The scheme could be operated like a ‘Peer-to-Peer’ lending operation with corporate donors ‘bidding’ online to fund projects that schools put forward. Operated by a not-for-profit schools co-op, seconded staff from the Dept of Education would assist the agency in a book-keeper capacity only; school Principals and parents would deal directly with the donor angels. To work, the government would agree to ring-fence existing annual funding.

(Letters to jill@jillkerby.ie  The TAB Guide to Money Pensions & Tax 2018 is available in all good bookstores. See www.tab.ie for ebook edition.) 

THIS HOUSING AND HOMELESS CRISIS AFFECTS US ALL

Just up the road are two Victorian terraced houses just like mine, with about 1,700 square feet of space and three or four bedrooms, depending on whether you squeeze someone into the box-room or not. There are two reception rooms, a kitchen of varying size and usually 1-2 bathrooms.

These two terraced houses were originally private homes, then bed-sits, then not very well-run private/public emergency-style bedsits when the absentee landlord came to a vague sort of arrangement with the city housing authorities.

After too many years of having to put up with episodes of anti-social behaviour, noise, general mayhem and on-going rat and refuse problems, the houses were put up for sale and sold to the city of Dublin as emergency accommodation.

Once the people in the white ‘hazmat’ suits (aka hazardous material) got finished with them, the building and renovation teams went in; they now provide safe, suitable, supervised emergency accommodation for mainly homeless families.  Most late nights that I walk the dog before we turn in I see taxis arriving with distressed parents and their sleepy children, the youngest clutching teddies; the older children carry their backpacks and pull their small suitcases up the path to the brightly lit entrance.

The Dublin Region Homeless Executive deal with families like this every night.

Last Thursday morning social media with full of pictures of six small children aged 1-11, who were sleeping on plastic chairs at Tallaght Garda Station. (A seventh, ill child was staying with others) They appeared to have slipped desperately through the net.

On the RTE 1 o’clock news, the DRHE spokesperson claimed that this was the only family of 10 in total who had dealt with by their Family Homeless Action Team but ended up without beds. All the others were either found shelter for the night, returned to their home areas (outside Dublin) or failed to make final contact with the action team.

A report in the Irish Times stated that this family of settled Travellers from Tallaght had been referred to the Garda Station by Focus Ireland and that they been homeless and for the past year after their rented house had been repossessed. The young mother told the paper that she had yet another appointment the next day with South Dublin County Council City but wasn’t very hopeful – they kept telling her they don’t “have any homes big enough… no hotel rooms big enough”.

That a family of this size has to wait “another four or five years for a house” isn’t acceptable, but there is more at play than just a shortage of suitable, affordable social housing. Our economy is still coming to terms with a crash that happened eight years ago and a much longer state policy to reduce social housing funding and rely on the private sector to fill practically the entire public and private housing demand.  

The government’s most recent policy, undertaken at the behest of our international paymasters, has been to instruct NAMA and the state owned banks to sell off the properties and so called un-performing mortgages it owns to large foreign vulture funds and domestic consortia of investors (who prefer to buying entire apartment buildings, swathes of housing estates). These properties are now rented to the highest bidders. Housing charities say they are unable to compete with the vultures or REITs (Real Estate Investment Trusts) for these assets.

But still, bricks and mortar remain Ireland’s favourite investment. Fortunes have been made and lost and are being made again, mostly by individual professional landlords and the gombeen ‘stack-em-high’, ‘cash only’ versions who don’t pay their taxes. Even many amateur, ‘this-is-my-pension’ landlords cash in on the misery of working families, modest and low earning workers, and students, especially the tens of thousands of foreign students and immigrants who are viciously exploited by demanding huge rent increases.

Quickly bringing more social housing into the market is a big part of the solution, but so is pursuing the owners of vacant, derelict properties and sites to do rent or sell them or face bigger levies.

Better tax and rent incentives should be offered reluctant amateur landlords to lease their properties under existing schemes to local authorities managers who in return will pay them a steady, fair rent for the agreed term. Illegal overcrowding – where 10-20 people are packed into ordinary private houses/apartments (some sharing double beds) needs to be ended by city authorities, fire and safety authorities and the owner/landlords pursued by flinty eyed investigators from the Revenue Commissioners.

And finally more good, decent, honourable people with a spare room in their homes should be urged to consider joining the tax-free, Rent-a-Room scheme and ask for a reasonable, as opposed to vastly inflated ‘market’ rate, to someone who is desperate for a room (and bed) of their own.

(Letters to jill@jillkerby.ie   The TAB Guide to Money Pensions & Tax 2018 is available in all good bookstores. See www.tab.ie for ebook edition.)  

A TAX-FREE PENSION GIFT IS JUST WHAT YOUNG WORKERS NEED

Will your children or grandchildren enjoy financial security in their old age? Is there anything practical you can do, right now, to give them a leg up on the pension ladder?

As I have written many times before, the government is perfectly aware that there is a massive, growing pension problem in this country and have produced numerous reports over the past three decades that keep reaching the same 25 solution: the introduction of a soft-mandatory, auto-enrolment pension scheme for the private sector. It now claims that such a scheme will be in place in Ireland by 2023.

Whatever about their good intentions, I think the 2023 target date is over-optimistic.  Workers, employers, unions, the Revenue Commissioners, pension companies, fund managers, administrators, trustees and regulators all have to be singing off the same proverbial hymn sheet before it will happen. The economy has to be in healthy, growth mode and vested interests have to be over-ruled. 

Ireland is not unique. Other countries like Australia, New Zealand, Chile and more recently (but after about 12 years of planning) the UK, have dealt with met these challenges and introduced auto-enrolment schemes to ensure that all private workers are covered and will not be wholly reliant on the unsustainable state old age pension.

We’ll be coming back to this pension impasse in future columns, but anyone waiting another five years for the possible introduction of a mandatory occupational pension is very foolish.  Time, lots of it, is one of two essential ingredients in an orderly, affordable retirement. The other is the amount you/your employer contribute.

A recent Irish Life survey (reported here three weeks ago) showed that the average age that pensions are started is now 37, giving the worker a mere 28 years to help fund 20 years of retirement (from age 65.)

The reality is that most workers today will have a number of jobs over their lifetime with varying degrees of pension coverage, or none at all.  Few will enjoy the consistent, steady, annual, tax deductible, low cost pension contributions that are needed to produce a decent retirement income by today’s standards. 

But there is a way to help give our young people (from age 18) a big pension leg-up. And that is via one of the few remaining tax-free opportunities still available (along with pensions and the Rent-a-Room scheme): the €3,000 capital acquisition (CAT) tax-exempt gift which is put into their first personal retirement savings account (PRSA).

A little background may be useful: anyone with €3,000 to spare can gift another person up to that amount every year and it doesn’t matter what their relationship: they can be close relatives, friends of even complete strangers. The recipients get the gift entirely tax-free and these annual gifts are not taken into account in determining any lifetime AT liabilities.

This CAT-exemption is commonly used as succession planning device by older family members who want to give away their wealth tax-free when they believe they loved need it most.

In the case of pension funding, the €3,000 annual gift goes into the young person’s PRSA because it will have fantastic, long term financial impact.

First, you don’t need to have a job to set up a PRSA, but without taxable income you won’t be able to claim pension income tax relief of 20% or 40%. However, once the young person does start working – and for many that isn’t until age 24 or 25 after the complete third level studies - the gifted contributions in their PRSA can be offset against any income tax they do pay and that offsetting continues until the pension contributions are all used up.

Irish Life’s recent pension report included a table that showed the difference between starting a pension at age 25 instead of at 35, 45, or 55. The starting salary (indexed at 3%) was €51k. Salary contributions were a consistent 11.4% and annual fund growth was a 4%.

The 25 year old retired at 65 with a gross fund worth nearly €463,000. The 35 year old with nearly €311,600; the 45 year old with c€187,00 and the 55 year old with just €84,470.

Irish Life told me that the 25 year old whose generous relative had put €3,000 into her PRSA for seven years (from age 18), could expect a gross pension fund at 65 of €563,500 instead of €463,000 and that was even before any investment growth over the seven years had been taken into account. 

This is a great example of the practical pension / inheritance options that a proper fee-based financial adviser can recommend to both older, well-off relatives who want to help, and to every young worker.

Waiting for the government to provide solutions is not advised.

Their [tax] policies, declared a certain Jean-Baptist Colbert “consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

(Letters to jill@jillkerby.ie   The TAB Guide to Money Pensions & Tax 2018 is available in all good bookstores. See www.tab.ie for ebook edition.)