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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
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?
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.
Trust in US TIPS to beat inflation
In an inflationary market TIPS, the US Treasury Inflation-Protected Securities are most compelling says Cris Sholto Heaton.
By Cris Sholto Heaton Published
The jury's out on the AI summit at Bletchley Park
World governments gathered for an AI summit at Bletchley Park in November, but were they too focused on threats at the expense of economic benefits?
By Simon Wilson Published
NatWest-owned Ulster bank boosts easy access savings rate to 5.2%
Rates on easy access savings accounts have hit over 5%, with Ulster Bank now giving savers the chance to earn 5.2% on their cash savings. We have all the details.
By Marc Shoffman Published
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.
By Ruth Emery Published
October NS&I Premium Bonds winners - check now to see what you won
NS&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
By Kalpana Fitzpatrick Published
October’s NS&I Premium Bond winners revealed - have you scooped £1 million?
Two lucky NS&I Premium Bond winners are now millionaires this October. Find out here you are one of them
By Kalpana Fitzpatrick Published
The best packaged bank accounts
Advice Packaged bank accounts can offer great value with useful additional perks – but get it wrong and you could be out of pocket
By Tom Higgins Published
Energy bills to fall 7% under new price cap
Energy bills could fall by an average 7% from October under the new Energy Price cap announced today. We explain what the new cap mean for you and when it will come into play
By Pedro Gonçalves Published
Bank of Baroda closes doors to UK retail banking
After 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
By Vaishali Varu Published
The best options to earn cashback on spending
From credit cards and current accounts to cashback websites, there are plenty of ways to earn cashback on the money you spend.
By John Fitzsimons Published