The furlough scheme set up in March 2020 was designed to save jobs. Now it’s been extended again and this month I’m looking at its impact on workplace pensions. More specifically, how you can organise yourself so as not to lose out.
Pensions and Furlough are Connected
Furlough, or the Coronavirus Job Retention Scheme, is government support to businesses hit by the pandemic. It pays 80% of employees’ wages on temporary during the crisis. It’s currently extended until 30 April 2021. The maximum that can be claimed per employee is £2,500 per month before tax.
Initially, the furlough programme paid for employer contributions towards employees’ pension funds. However, CJRS changed in August-October 2020, when they tried to phase it out, thinking the worst was behind us. Government subsidy was cut to 70% then 60%, before a U-turn back to 80% in November.
Here’s where it hit pensions. The Government stopped paying employer contributions in August 2020 and did not revert to paying them in November. so, from the 1st August 2020, if you were furloughed, your employer also needed to pay 3% of your salary into your pension, with employees paying the remainder amount from wages.
Also, worth noting, if you were on furlough, your payment contributions were based on your lower, furlough salary – reducing your monthly pension payments and therefore the size of your pension pot.
And there’s more. If your employer paid more than the minimum 3% of your salary as a pension contribution, they could opt only to pay the minimum requirement during furlough, without needing to consult you on this. With cash tight for most businesses, this has happened a lot, I believe.
Defined Contribution Pensions and Furlough
With these pension plans, what exactly you pay into your pension is directly proportional to your salary. The employer and employee pay in defined, fixed percentages. As salary comes down, your payments in go down, too, unless you’re in a position to pick up the difference.
Salary Sacrifice Pensions and Furlough
Salary sacrifice pension schemes are another type of workplace pension. You take a lower salary, and your employer pays what you have sacrificed into your pension. You’ll reduce your National Insurance liability by this route. If you’re on furlough but paid for your pension through salary sacrifice, there is an impact on your pension payments. This is from the reduced Government payments and the impact of the lower salary.
Opting Out is a Possibility
This is a big decision with obvious long-term implications. Don’t forget that if you stop paying into your pension, so does your employer. You also lose tax relief. So, all in all, your pension takes a disproportionately hard hit compared to the savings in monthly income you make in the short term.
Before you do anything like this, I suggest seeking professional advice, I’m here to help.
What About NI Contributions?
You still must pay NI. While money may be tight, it does ensure you remain entitled to your state pension at retirement age. Particularly in the case of women – who are more likely to have taken a career break – paying enough National Insurance over the years is essential if you want to remain eligible for your State pension when the time comes.
Furlough, Pensions and the Self-Employed
Most employees pay taxes through PAYE. This made it easy for the Government to calculate and pay furlough. It’s much more complicated for the self-employed and depends a lot on whether you received grants or not to cover lost profits.
If you did get a grant, it’s worth knowing that it can be used to give a higher pension contribution for private pensions for self-employed individuals. Remember, it is possible with a SIPP to invest all income up to the amount of £40,000 in 2020/21 and benefit from tax relief from the Government. Having the grant may help you make the most of this allowance if your situation allows.
The Long-Term Impact on Pensions
The impact of furlough on pension pots will be negative for the reasons explained above, for most recipients. It seems there’s no escaping the impact of COVID-19. This’ll be a result of reduced payments owing to lower levels of income. Or, for some, no payments at all. The true scale of the impact on a specific individual will depend on how old they are and how long the reduced payments continue for.
Unless you can make it up soon, the cumulative effect of lower payments will mean having less to spend at retirement age.