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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Lower contributions
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.
-
Pension warning: one in five don’t know how much is going into their pensionHow to check your pension contributions and why it matters
-
50,000 power of attorney applications rejected – how to avoid common mistakesA freedom of information request shows that thousands of lasting power of attorney (LPA) applications are rejected due to errors. We explain how to avoid mistakes and reveal tips to make the process as straightforward as possible
-
Act now to bag NatWest-owned Ulster Bank's 5.2% easy access savings accountUlster Bank is offering savers the chance to earn 5.2% on their cash savings, but you need to act fast as easy access rates are falling. We have all the details
-
Moneybox raises market-leading cash ISA to 5%Savings and investing app MoneyBox has boosted the rate on its cash ISA again, hiking it from 4.75% to 5% making it one of top rates. We have all the details.
-
October NS&I Premium Bonds winners - check now to see what you wonNS&I Premium Bonds holders can check now to see if they have won a prize this month. We explain how to check your premium bonds
-
Bank of Baroda closes doors to UK retail bankingAfter almost 70 years of operating in the UK, one of India’s largest bank is shutting up shop in the UK retail banking market. We explain everything you need to know if you have savings or a current account with Bank of Baroda
-
How to earn cashback on spendingFrom credit cards and current accounts to cashback websites, there are plenty of ways to earn cashback on the money you spend
-
John Lewis mulls buy now, pay later schemeThe CEO of John Lewis has said the retailer will consider introducing buy now, pay later initiatives for lower-priced items.
-
State pension triple lock at risk as cost balloonsThe cost of the state pension triple lock could be far higher than expected due to record wage growth. Will the government keep the policy in place in 2024?
-
Paragon raises rate on one-year fixed cash ISA to 5.75%Paragon Bank ups its one-year fixed cash ISA rate to 5.75% - is it enough to top the table?
