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5 Jun 2020

Pension contributions for furloughed staff to change from August - what it means for your savings

Find out how changes to the furlough scheme will affect your pension income

Employers will be required to resume payments of the 3% minimum auto-enrolment pension contribution to furloughed workers from 1 August.

In March, the government agreed to cover the cost for defined contribution (DC) members. This formed part of its 'coronavirus job retention scheme', in which it agreed to pay 80% of salaries up to £2,500 for employees who are asked to stop working but kept on the company payroll - or 'furloughed' - during the coronavirus crisis.

Chancellor Rishi Sunak has said that the job retention scheme will continue until October, but the government will begin phasing in a shared cost arrangement with employers, which includes them covering minimum pension contributions in full.

Here, Which? explains how the job retention scheme will work for pensions going forward and whether this will impact your savings.

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Why did the government agree to pay furloughed staff's pensions?

When the coronavirus job retention scheme launched, promising to pay 80% of salaries, it was feared that pension contributions would be put on ice.

If the government ignored pensions in this instance, it would have had a long term negative impact for the retirement prospects of millions of pension savers.

But pensions weren't forgotten and the government confirmed it would pay the 3% minimum. We put together a more detailed story at the time the government confirmed its approach.

How does the job retention scheme work for pensions?

Under auto-enrolment, which was introduced in 2012, at least 8% of your monthly salary must be put into your pension each month; 5% comes from you and at least 3% is meant to be put in by your employer.

Currently, the job retention scheme sees the government replace a 3% employer contribution into staff pension pots on earnings between £520 and £2,500 a month. It only matches the usual employer contribution to 3% even if the amount you normally get is higher.

Employees are still required to contribute at least 5% of their furloughed salary on top of this.

This means people who usually earn above £2,500 a month, could be seeing less money in their pot each month for the time being, unless you or your employer make up the missing amounts.

Your contributions will be paid on your 'qualifying earnings' - your earnings from employment, before income tax and National Insurance contributions are deducted, that fall between a lower and upper earnings limit that is set by the government. This rests at between £6,240 and £50,000 for 2020-21.

So say you receive the maximum furlough salary of £2,500 per month, your pension contribution would be £99 (5%) on qualifying earnings of £23,760 per year. Your employer's monthly contribution would be £59.40 per month (3%) taking your total monthly contributions to £158.40.

This includes tax relief on your contributions; basic-rate taxpayers get 20% pension tax relief and higher-rate taxpayers can claim 40% pension tax relief. Without tax relief on your employee contributions, you'd be paying £118.80 per month.

Will the move to a shared furlough scheme affect my savings?

The changes to the job retention scheme will not affect how much money furlough workers receive in their pension pot compared to when the government was taking on the cost.

Your employer will need to pay in at least 3% and you will be required to pay 5%.

However, there is some concern that once the burden of paying employees is shared with the government it could have a negative impact on a business's cash flow.

Following the modest changes to the scheme in August, the government will reduce payments to individuals to 70% of salaries, or up to £2,190, while employers will pay 10% from September.

The government will then reduce its salary payments under the scheme to 60% up to £1,875, in October, with employers required to pay the other 20%. The scheme will then be phased out completely at the end of that month.

The minimum 3% and 5% pension contributions will always be paid in full, up to the furlough amount each individual receives.

Can I opt-out of saving into a pension?

If your pay has been affected by coronavirus, or you simply want to cut down on costs during this time you can opt-out of paying into your pension.

However, saving for retirement is really important, so you should only really be doing this if you need the money right now to pay essential costs.

Opting out involves getting an opt-out form from your pension provider or doing so via an online account. You can get contact details of the pension company from your employer.

If the form is completed and returned to your employer within one month of being automatically enrolled, any money you have paid into the pension will be refunded, otherwise, the money will be held in the scheme until you can access it. If you wish to opt back into your pension, you'll need to ask your employer.

I'm self-employed: am I eligible for automatic enrolment?

Self-employed workers aren't automatically enrolled into a pension scheme. However, it's still sensible to plan for your retirement and start a pension if you can.

You can opt for a personal pension or a self-invested personal pension (Sipp) to invest your retirement savings.

While any contributions will have to come from you, you'll get a contribution from the government in the form of pension tax relief.

How else is coronavirus affecting pensions?

Rises or falls in the stock market affect how much is in your overall pension pot, too. For example, if you have a DC pension - whether private or through work - your savings have probably also been hit quite hard in the short term.

This is because stock markets - which at least some of your savings will be invested in - haven't been performing well due to the uncertainty around the pandemic.

If you're worried about how coronavirus is impacting your other finances, you can keep up to date on our latest coverage on our coronavirus advice hub.