When Rishi Sunak set out the furlough scheme in March 2020, he shocked many by how lavish it was. However, while its purpose was to save as many jobs as possible during the pandemic, it has had further repercussions on people’s workplace pensions too. Here we look at how the furlough scheme affects workplace pensions and what specifically you should be aware of if you have been placed on furlough over the last year.
What Exactly is the Furlough Scheme?
The furlough scheme is a government-backed support initiative. It pays 80% of employees’ wages who have been put on temporary leave due to the result of the Coronavirus pandemic. Also known as the Coronavirus Job Retention Scheme, it began at the end of March 2020 and has currently been extended until 30 April 2021. The maximum that can be claimed per employee is £2,500 per month (gross pay).
How Does the Furlough Scheme Impact your Pension?
Originally, the furlough scheme paid for employer contributions towards employees’ pension funds. However, the furlough scheme altered slightly from the end of Summer 2020 as the Government started to phase the scheme out. In doing so, the Government told employers it would pay 70% of a furloughed employee’s wages, and that the employer had to make up the rest to 80%. Then, in October, the Government reduced its portion further to 60%, with the employer paying the remaining 20%. However, from November 1st 2020, the Government reverted to paying the full 80% of wages.
In terms of workplace pension contributions, the Government stopped paying them in August 2020 and did not regress to paying them in November either. Therefore, from the 1st August 2020, if you were furloughed, your employer had to pay 3% of your salary into your pension, with you paying the remaining amount from your wages. The outstanding amount for auto-enrolment schemes is 4%, with tax relief bringing contributions up to 5% of your salary.
However, even before the Government stopped paying workplace pension contributions, if you were on furlough, your payment contributions were based on your lower, furlough salary – thus lowering your monthly payments into your pension pot.
Plus, you may find that your employer, who usually may have paid more than the required 3% of your salary as a pension contribution, may choose only to pay the minimum requirement. Given that cash flow is such a problem for businesses during the pandemic, employers are also not required to even consult you about this as they would do usually.
Pensions and Contributions for the Employed
Workplace pensions can be confusing at the best of times, but there are a number of basic principles that are vital for employees to understand. Originally, you need to know whether you are part of a defined contribution pension scheme or a salary sacrifice pension payment plan. The furlough scheme can have varyingly different implications on either one of these personal pensions.
Defined Contribution Pension Schemes and Furlough
When you begin working at a company, you should be automatically enrolled in a workplace pension scheme. As a result, your employer is required to pay 3% of your qualifying earnings into your own pension pot. You are then due to pay a further 4% of your pre-tax salary into your pension – again, based on your qualifying earnings. Lastly, you will receive tax relief as a result which likens to paying 1% more into your pension fund. In total, 8% of your earnings are put into your pension pot.
What exactly you pay into your pension is therefore closely tied to your overall salary. In 2020/2021, eligible earnings were between £6,240 and £50,000. If your employer chose to put more into your pension pot than the required 3%, then you can put in less to bring up the total contribution to the required 8%.
What Happens if I have Opted for Salary Sacrifice and I’m on Furlough?
Salary sacrifice pension schemes are when you negotiate a smaller salary with your employer, but they pay what you have forfeited into your pension or in other benefits. You will also reduce your National Insurance payments by doing so. If you are on furlough but your pension is paid through a salary sacrifice scheme, there is an impact on your pension payments.
Given that you are earning a lower salary, your initially higher pension payments would not have been covered by the Government’s furlough scheme. Instead, the government will only have paid 3% of your qualifying earnings into your pension pot – which could have been less than your employer was ordinarily paying into your pension. Additionally, you will have been earning 80% of the lesser salary you agreed in exchange for other benefits which could further intensify the reduction in your pension contributions.
Can I Opt-Out of my Workplace Pension Whilst on Furlough?
Not paying your own employee pension contribution, if you are on furlough, is a huge decision to make. In short, if you can afford to keep paying to your pension, do. Saving up for your retirement is one of the most essential financial decisions you will ever make, and the sooner you do it the better. Finally, any pauses in your payments can make big differences at retirement.
It’s logical that with a lower income, you may want to make savings to help meet day to day costs. And yes, you definitely can. These are critical decisions though, if you have questions on your retirement income you can rely on pension investment advice.
But remember, by ceasing your contributions on an auto-enrolment scheme, you will also stop your employer pension contribution and you will not benefit from the tax relief you could have earned by paying into your pension either. Don’t forget, the cumulative and compounding effect of paying into your pension pot each month, year on year, can make a massive difference when you are due to retire.