As the clock ticks on AE launch, employees urged to weigh up their pension options carefully

With only three months to go before Auto Enrolment (AE) is due to launch in Ireland, the 800,000 workers set to be signed up to the scheme are being warned to weigh up their pension options carefully to ensure AE suits their expected personal retirement needs and that they don’t lose out on valuable pension benefits.

In particular, higher-rate taxpayers are being advised that the tax benefits available with a Personal Retirement Savings Account (PRSA) could be more valuable to them than the State top-up available under AE. Furthermore, all workers, including standard and higher-rate taxpayers, are being reminded of the advantages which a company pension scheme could have over AE, especially where an employer pays pension contributions into a company pension scheme on behalf of its employees.

The cautionary advice, from Royal London Ireland, a leading provider of life insurance and pensions in Ireland, comes as the Government gears up to launch the AE scheme on January 1, 2026.  AE is a defined contribution pension scheme where employees’ contributions are matched by their employers and supplemented with a top-up from State funds. The State’s top-up contribution will be paid at a rate of €1 for every €3 the employee pays in, which is equivalent to 25% tax relief. As workers with private pensions can claim tax relief on pension contributions at their marginal rate of income tax, this means that generally, AE will be more beneficial for individuals who pay the standard rate of income tax (20%) but not be as beneficial for individuals paying the higher rate of income tax (40%).

However, this doesn’t necessarily mean that AE is the best option for all workers paying the 20% rate of income tax. Occupational pensions could prove more beneficial than AE for all workers – including those paying both 20% and 40% income tax - due to the employer pension contributions often paid to company pension schemes.

Mark Reilly, Pensions Propositions Lead with Royal London Ireland explained:

“While AE is welcome for many of the hundreds of thousands of workers who are not yet in a pension, it is important that workers don’t view AE as a ‘golden ticket’ to a comfortable retirement. AE offers the potential to address Ireland’s pension coverage gap by automatically enrolling workers without existing pension policies. However, it might not be the most suitable or sufficient option for an individual’s retirement needs so it is important that workers eligible for it do their due diligence on AE and other pension options.

“Higher rate taxpayers could lose out considerably on tax relief if they overlook or drop other pension options when AE is rolled out.

“For an individual earning €44,000 or less (and thus paying income tax at 20%), the 25% government top-up in AE is more advantageous than the 20% tax relief they would receive on a contribution to a private pension. For higher earners (those paying income tax at 40%), the 40% tax relief on contributions to a private pension is typically more significant than the 25% equivalent benefit provided by the State top-up under AE.

“But it’s not just higher rate taxpayers who could lose out with AE. All workers – including standard and higher rate taxpayers - who have not taken up the opportunity to join a company pension scheme could lose out financially if they don’t sign up to the company scheme before AE is launched. This is because any employer contributions being paid into a company pension scheme could be worth more than the employer contribution to be paid under AE, and could even be worth more than the AE employer contribution and State top-up combined.

“While employers are not obliged to make employer contributions to company pension schemes, many do and for this reason, company pension schemes will often be more advantageous than AE for both standard and higher-rate taxpayers. It’s important that workers with access to a company pension scheme know that they’ll be automatically signed up to AE if they haven't joined their employer's workplace pension by the time AE is rolled out – assuming they’re eligible for it. All workers need to be mindful of this and to get advice on their retirement options ahead of AE.

AE contribution limits could hamper retirement plans

Royal London Ireland is also warning workers that the contribution limits on AE could hamper their retirement plans:

• With a PRSA there is full flexibility to choose your level of employee contributions (subject to the tax relief limits on pension contributions). There is usually flexibility around contributions in company pensions too and employees typically have the option to increase their contributions through Additional Voluntary Contributions (AVCs) if they wish. By comparison, there is no flexibility around contributions, or opportunity to make AVCs, with AE. Instead, employee contributions are set at a percentage of earnings ranging from 1.5% to 6% in the first ten years and employees cannot save less or more.
• For those who wish to contribute more than the AE maximums (especially, above the €80,000 earnings cap for AE contributions), a private pension allows for significantly higher contributions with tax relief up to the age-related limits and the €115,000 earnings limit. Under AE, employer contributions will be calculated on, and capped at, up to €80,000 of an employee’s earnings only.

Mr. Reilly explained:

“The current contribution limits for AE could hinder workers from building up their pension pots to a level that would afford them a comfortable standard of living in retirement. It could also hinder people who have not had the opportunity to save into a pension yet from catching up on the years they lost saving into a pension. Depending on your time to retirement and how much you see yourself setting aside for retirement in the coming years, the contribution limits under the AE scheme might hamper your retirement plans if you want to put in more than the maximum contribution limits.”

Royal London Ireland is urging employees who might be considering dropping a PRSA once signed up to AE to be aware of the advantages which their PRSA might have over an AE pension. The leading provider of life insurance and pensions in Ireland is advising that where possible, these individuals consider holding onto their PRSA as a means of supplementing their AE pension.

Mr Reilly added:

“As long as you are not funding a PRSA through payroll, it will be possible to participate in AE and save into your PRSA, if you meet all of the AE eligibility criteria.”

Investment options & early access

Other key differences between AE and personal pensions,PRSAs and company pensions which Royal London Ireland is highlighting include:

• The investment options available in the AE scheme are limited when compared to many personal and company pensions, as the system will offer standardised investment options. With a personal pension, you usually have a broader range of investment options and more control over where your money is invested, which can be beneficial if you're a savvy investor.
• You may be able to access your pension fund earlier with a PRSA or company pension than is the case with AE. For example, with a PRSA, you can access your pension fund between the ages of 60 and 75 - and earlier access is allowed in certain circumstances. The earliest you will typically be able to access your AE fund is the age of 66, with early drawdowns only possible in the case of an ill-health retirement.

Mr Reilly concluded:

“One third of workers have no pension coverage outside the State pension^[1]. So it is imperative that private pension coverage in Ireland is improved – otherwise, a significant portion of the population could struggle financially when they reach retirement. AE will play a big role in plugging this gap. However, there is a danger that AE might lead some people, especially those who haven’t yet thought seriously about pensions, to believe that once they’re signed up to AE, they will have enough income in retirement to give them a comfortable standard of living. However, this might not be the case. For some, AE will be a good fit but for others, AE could fall short of delivering the retirement they’re expecting.

“AE is not a silver bullet for a comfortable retirement. It's important that those eligible for AE get expert independent financial advice to ensure they put the most suitable pension plans in place for their personal circumstances – whether that be supplementing AE with a PRSA or putting an alternative to AE in place.”

^{[1] As per CSO Pension Coverage 2024 report}