Rule of Thumb for enrolling in My Future Fund

[T McGibney]

Therefore I am better off in the AE scheme.

Not if 50% of your pension pot will stagnate in low-return bonds from age 51...

 

[Colm Fagan]

@Brendan Burgess Yes, I think that’s right. In answer to @T McGibney , it will only stagnate in the lower return fund if you’ve chosen the default option. You can decide to leave the money in the high return fund if you like (at an annual management charge of less than 10 bps!!)
What’s puzzling @Duke of Marmalade and me is whether the employer can contribute more initially (through a separate scheme) than is mandated under MFF, then gradually reduce it as contributions under MFF increase. It seems they can’t!!!

 

[Duke of Marmalade]

That is not easy for most people to follow.

The ER aspect is a distraction, it is treated the same which ever the route chosen.
So the simplified version goes like this:
1) EE contributes 60 from take-home pay to AE and gets 80 added to their MFF
2) EE contributes 75 from gross pay costing the same 60 from take-home pay and the 75 is added to the fund.
OR
The State top-up on take-home pay directed to a pension fund is: for AE 1 for 3 and with tax relief 15 for 60 or 1 for 4.
In the case of a 40% taxpayer the top-up is for AE 1 for 3 as before and with tax relief 2 for 3

 

[Fortune]

Not if 50% of your pension pot will stagnate in low-return bonds from age 51...

Assessing this is definitely beyond the average person that's likely to be in scope for AE

 

[LDFerguson]

I wonder if that will hold the next time the state looks at levying pensions again

I wouldn't bet on it. Private sector pension funds are not the property of the Government either but that didn't stop the Government of the time creating a new rule allowing them to take money from them when they wanted to.

 

[LDFerguson]

That is not easy for most people to follow.

Assessing this is definitely beyond the average person that's likely to be in scope for AE

I agree. I think that's why short, snappy summaries of conclusions of analysis like this and indeed @Duke of Marmalade's rule of thumb need to be publicised.

 

[T McGibney]

Assessing this is definitely beyond the average person that's likely to be in scope for AE

Isn't that rather patronising?

 

[Brendan Burgess]

So the simplified version goes like this:
1) EE contributes 60 from take-home pay to AE and gets 80 added to their MFF
2) EE contributes 75 from gross pay costing the same 60 from take-home pay and the 75 is added to the fund.
OR
The State top-up on take-home pay directed to a pension fund is: for AE 1 for 3 and with tax relief 15 for 60 or 1 for 4.
In the case of a 40% taxpayer the top-up is for AE 1 for 3 as before and with tax relief 2 for 3

I am just not sure that the ordinary punter would understand either of these explanations, or my explanation either.

I will think about how best to present it.

The Employer Contribution is only irrelevant if the Employer matches the EE contribution in the private scheme.

 

[Duke of Marmalade]

The Employer Contribution is only irrelevant if the Employer matches the EE contribution in the private scheme.

It is irrelevant if we are considering the same ER contribution under either system. Obviously if the ER contributes 10% that will swamp any incentive advantage of AE.

 

[Duke of Marmalade]

I am just not sure that the ordinary punter would understand either of these explanations

Tax relief is equivalent to a 1 for 4 top up for SR-EEs and to a 2 for 3 top up for HR-EEs.
Not quite as simple as ice cream but not rocket science either.
Now if they want to understand where that came from they will need the basics of junior cert math.

 

[Itchy]

What’s puzzling @Duke of Marmalade and me is whether the employer can contribute more initially (through a separate scheme) than is mandated under MFF, then gradually reduce it as contributions under MFF increase. It seems they can’t!!!

In the Q&A I linked to earlier, 1) Set contribution rates apply to AE and 2) when contributions are made through payroll (by ER or EE), the employee is not eligible for AE. So it's one or the other, per each employment. If you have two employments and have two memberships of AE, then contributions cease at €80k gross salary. In addition, employers must continue to offer a PRSA option to employees in addition to the AE scheme (though they cannot make contributions to the PRSA or that will render the employee in eligible for AE).

 

[ClubMan]

Tax relief is equivalent to a 1 for 4 top up for SR-EEs and to a 2 for 3 top up for HR-EEs.

Is this actually correct? The equivalent of 25% for a standard rate taxpayer and 66% for a high rate taxpayer?

 

[Brendan Burgess]

If you get tax relief at 20% and pay through an employer's scheme...
You contribute €100
You get €20 tax relief.
So you are getting €20 for €80 of cost
Which is 1 for 4.

In other words, if the state said "Contribute €80 of your net pay and we will top it up by €20" that would be 1 for 4 or 25% top up.

But the AE scheme is 2 for 6. Or 1 for 3

But most people with LC Maths would not figure this out.

 

[Brendan Burgess]

Would it help to say

Under the AE scheme, if you contribute €12, the state will add €4.

If you are not paying tax and have an employer scheme, and you contribute €12, the state will contribute nothing.

If you are a 20% tax payer, and have an employer scheme, and you contribute €12 from your net pay, the state will add only €3 .

If you are 40% tax payer and contribute €12 from your net pay through an employer scheme, the state will add €8

So if you are not paying tax at all, the AE Scheme is great value.
If you are paying 20% tax, the AE Scheme is better value than being a member of the company scheme.
If you are a 40% tax payer, then you should be in the company scheme.

This all assumes that your employer will match your net contribution to the pension fund.

 

[Duke of Marmalade]

But most people with LC Maths would not figure this out.

It does seem to be a challenge.
That’s why AAM are cutting to the chase.
MFF is 1 for 3 top-up on take home pay put aside
Conventional is a 1 for 4 top-up for the standard rate taxpayer, 2 for 3 top-up for the 40% taxpayer and of course zero for a non taxpayer

 

[Duke of Marmalade]

Is this actually correct? The equivalent of 25% for a standard rate taxpayer and 66% for a high rate taxpayer?

Well yes. 1 for 4 is 25% and 2 for 3 is 66%. It is important that we are talking about percentages of after tax pay diverted to pension. That is because the 1 for 3 top up is in after tax space. In tax relief space it is more usual to think in terms of gross pay diverted to pension and we get the different %s of 20 and 40.

 

[Colm Fagan]

In the Q&A I linked to earlier, 1) Set contribution rates apply to AE and 2) when contributions are made through payroll (by ER or EE), the employee is not eligible for AE. So it's one or the other, per each employment. If you have two employments and have two memberships of AE, then contributions cease at €80k gross salary. In addition, employers must continue to offer a PRSA option to employees in addition to the AE scheme (though they cannot make contributions to the PRSA or that will render the employee in eligible for AE).

Thanks, @Itchy; however, I'm still a bit confused. Maybe I'm reading too much into specific wordings. For example, you say above that "when contributions are made through payroll (by ER or EE), ...". But surely employer contributions don't go through payroll? Also, the Q&A states: "If you already have a pension that you are actively paying through payroll .. you are not eligible for the scheme", which would also seem to imply that contributions by Er only would not make you ineligible.
Then, there is the question "How will NAERSA know that an employee has a private pension?". The answer given is that NAERSA won't know and that it's up to you if you want to continue contributing to both. So, go ahead and have MFF and private pensions if you want!!
Am I overcomplicating it?

 

[Duke of Marmalade]

In the Q&A I linked to earlier, 1) Set contribution rates apply to AE and 2) when contributions are made through payroll (by ER or EE), the employee is not eligible for AE. So it's one or the other, per each employment. If you have two employments and have two memberships of AE, then contributions cease at €80k gross salary. In addition, employers must continue to offer a PRSA option to employees in addition to the AE scheme (though they cannot make contributions to the PRSA or that will render the employee in eligible for AE).

I missed this. Have you any collaborating and more official support of this? It seems an indefensible and illogical prohibition on the punter being in AE and also in a "top-up" company scheme.
I think this Q & A is simplifying the answer to employees. It assumes that if there is already a scheme in place then naturally the employer will be exempt from its AE responsibilities and will surely have availed of that exemption. Ergo the punter is "ineligible" for AE because their employer was exempt from facilitating AE. They would be loathe to envisage employers having to run two schemes, MFF for their standard rate taxpayers and a conventional scheme for their 40% taxpayers.
We saw this mindset in an answer from the Minister to a PQ. The PQ asked to confirm whether an employee on the 40% tax rate would be better off than in the MFF. The Reply argued that the situation does not arise as clearly if the employer has a scheme already then the employee would not be eligible for MFF.

 

[Itchy]

Maybe I'm reading too much into specific wordings. For example, you say above that "when contributions are made through payroll (by ER or EE), ...". But surely employer contributions don't go through payroll?

What if employers already have a pension scheme in place for their employees?​

Any existing pension scheme will run in parallel to auto-enrolment. Any employees that have a record via payroll of either employee contributions and/or employer contributions will not be enrolled in the scheme.

I can't envisage a scenario whereby an employer makes a pension contribution on behalf of an employee and it is not put through payroll (i.e. reported to Revenue)?

 

[Itchy]

Have you any collaborating and more official support of this? It seems an indefensible and illogical prohibition on the punter being in AE and also in a "top-up" company scheme.

I'm just reading the Q&A here so no additional insight at all.

My read is that would not be the situation in respect of a single employment, but could arise over multiple employments.

Do existing schemes need to meet standards to be exempt?​

No, once there is a pension contribution paid through payroll from an employee or employer, the employee will be deemed as having pension coverage already and won’t be enrolled with respect to that employment. However if you have another employment for which you are not contributing to a pension through payroll, you may be enrolled in respect of that employment.