Wednesday 6 May 2020

Industry Insights: Pension contributions for furloughed workers



Industry Insights Series Q2 2020
Jessica Amodio, Financial Adviser

As an employee, your employer may have had to furlough you as part of the business response to the coronavirus crisis. Being furloughed means that your employer keeps you on the payroll while they are unable to operate or have no work for you to do because of coronavirus. This allows your employer to access funding from the Government via the Job Retention Scheme which covers 80% of an employee’s regular month wage or £2,500 (whichever is lower). The funding also covers both the employer National Insurance Contributions and minimum automatic enrolment contributions. 

What being furloughed means for auto enrolment pensions 

From 6 April 2019 the minimum total contribution is 8% of qualifying earnings. The employer must pay 3%, the employee must pay 5%, and the government adds tax relief of 1%. As part of the Job Retention Scheme, the government will pay the auto enrolment minimum employer pension contribution which is 3%. This is based on the 80% adjusted furloughed salary or £2,500 per month if lower. You will need to continue paying your 5% contribution to get the Government’s addition.  Your own pension contributions and your employer’s pension contributions will continue as normal unless told otherwise.  

If you are struggling with cashflow then there may be the option to reduce contributions, suspend contributions, or opt out of the plan altogether. Any of these options require careful consideration as they could have a massive impact on the value of your pension savings when you come to retire.  

It is worth noting that if your employer pays above the statutory minimum pension contribution, the Government will not cover anything over the standard 3%. If your employer wishes to continue paying an increased contribution, then the difference will need to be funded by themselves.  

In addition, some people have an arrangement with the employer that they will continue paying 100% of normal salary, rather than 80% from the Government. In these cases, the pension contribution which is claimed from the Government will be calculated using the furloughed salary rather than the normal salary.  

What being furloughed means for defined benefit pensions 

Defined benefit pensions provide a guaranteed income for life after retirement and are therefore regarded as the safest and most generous pensions available. In the private sector they are virtually all closed to new contributions, and those in the public sector are backed by the taxpayer. The government has not specifically mentioned defined benefit schemes, so it is unclear what impact furloughing will have on them. It is anticipated that they will follow the same rules as above, and contributions will remain unchanged unless otherwise stated.  

If you have any questions regarding your pension, please do contact your adviser who will be happy to speak to you and go through any options that may be available.