Have you been furloughed? Here's how it could hit your pension entitlement
Your pension savings could be squeezed by the state's furlough scheme – and its withdrawal.
For more than eight million people the government’s furloughing scheme is a lifeline, enabling employers to keep staff on when they might otherwise have had to consider redundancies. However, if you’ve been furloughed, you do need to keep an eye on your pension savings, particularly as the Job Retention Scheme changes over the summer.
The auto-enrolment pension system requires all employers to offer a pension scheme and to enrol you unless you specifically opt out. At least 8% of your monthly salary must go into the scheme each month, with 5% coming from you and 3% coming from your employer.
The good news is that furloughing covers pensions: if you’ve been furloughed, you still need to pay the 5% from the wages you’re receiving through the scheme, but the government is currently picking up the cost of the 3% so that you don’t miss out even if your employer can’t pay.
There are a couple of important caveats here, however. The state will only pay the minimum 3% contribution, even if your employer has been paying much more than that.
Moreover, it only pays 3% on earnings of up to £2,500 a month, the maximum benefit available from the furloughing scheme, so if you earn more than that, you may be missing out. In some cases, employers are topping up pay and pensions over and above state support – but many are not able or willing to do so.
From August, moreover, the government will start to wind down the Job Retention Scheme, slowly but steadily asking employers to shoulder more of the burden.
This starts with employers becoming responsible for pension costs. From August onwards, the 3% minimum contribution under auto-enrolment will once again come from your workplace.
Facing a shortfall
In theory, employees should notice no difference. You’ll still be receiving the 3% contribution, but the government will no longer be supporting employers to pay it.
In practice, however, there will be many firms that find pension contributions difficult to fund because their sales have yet to recover from the effects of the Covid-19 pandemic. So they could find it harder to make any additional contribution to get your pension savings back to the level they were at before the pandemic. The squeeze may intensify in September and October when employers have to start funding more salary payments themselves. Savers therefore need to understand exactly what is going into their pension funds and how this differs from what was the case before the virus. How far are your savings falling short of what they used to be?
In the long run, a couple of months of lower pension contributions won’t make a massive dent on your wealth in retirement, though the effects certainly add up over time thanks to compound interest. But if the problem persists, you will see a difference. Many employers pay contributions of between 5% and 10% of pay, especially if staff also contribute more. If you’re losing much of this cash for, say, six months or more, you may need to consider your options. Could you, perhaps, increase your own savings?