What happens to your company pension if your employer puts you on furlough during the pandemic? With organisations employing around four million people applying to take part in the government bail-out scheme in its first week alone, this is a key concern for a huge number of savers.
There’s good news and bad. Happily, the furloughing scheme includes pensions: the government’s promise to cover 80% of wages, up to £2,500 a month until at least the end of June extends to the pension contributions your employer makes on your behalf.
But less positively, these contributions will be calculated with reference to a smaller sum than usual, which means less money going into your savings. And the state will only pay the minimum contribution permissible under auto-enrolment.
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Both these downsides threaten to take a bite out of your pension entitlements. The auto-enrolment rules require your employer to pay at least 3% of your salary into your pension, so this is what the government will pay, even though many schemes offer higher contribution rates.
Your employer can top you up, but many will not feel able to do so and the Pensions Regulator has said it is not obliged to. Remember, too, that you’ll only get 3% of the 80% or £2,500 per month, not your full salary.
One important question is whether you can afford to continue making your own pension contributions as usual. For employees, the minimum rate under auto-enrolment is 4% of pay, but many contribute significantly more. If you’re feeling the squeeze because you’re earning less while on furlough, it may be difficult to sustain these payments.
Many employers are allowing staff temporarily to reduce pension contributions or suspend them altogether. And all employees have the option of opting out of their workplace scheme.
Still, the best option for savers is to continue making their contributions at the highest possible rate they feel comfortable with; reducing or suspending savings will inevitably hit the value of your retirement benefits over the longer term.
Savers in salary-sacrifice arrangements are particularly vulnerable under furloughing. With these arrangements, employees forego some of their salary, which is instead paid into their pension scheme.
There is a national insurance advantage for employees and employers alike. However, benefits offered through salary-sacrifice schemes are not covered by the furloughing scheme, so your employer will not be able to claim them. In many cases, employers will be bound by contracts to continue funding employees’ pensions under these schemes, but some may seek agreement from staff to suspend them to bolster their cash flow. You will need to consider such requests carefully, weighing up lost benefits against the viability of your employer.
Take a long-term view
Above all, however, don’t panic. The furloughing scheme lasts only until 30 June (although it could be extended if the Covid-19 lockdown continues). If you’re saving for a retirement that is ten or 20 years away – or more – a few months of lower contributions are not the end of the world. Still, the cost of missed savings does add up over time. The more you maintain pension payments today – or increase them later on to make up for this period when your finances allow – the better the end result will be.
David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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