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I’ve been furloughed. What does it mean for my pension?

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22/04/2020
Our expert tackles your questions on what happens to workplace pension contributions if you've been furloughed by your company.

The government’s Coronavirus Job Retention Scheme went live this week, with more than 140,000 firms applying for help to pay furloughed workers’ salaries on day one.

It’s hoped the scheme, which lets employers apply for grants to cover 80% of an employee’s pay, up to a monthly maximum of £2,500, will help prevent mass lay-offs during the Covid-19 outbreak.

Both businesses and employees will have many questions about how the scheme works. We’ve tried to cover as many of these as possible in our guide to being furloughed, which you can read here.

If you are worried about the longer-term implications of being furloughed, for example what it means for your workplace pension, Maike Currie, director for workplace investing at Fidelity International, addresses some of those concerns here.

Will contributions to my workplace pension stop if I’m furloughed?

“No. Employers must continue to meet their obligations and responsibility under the automatic enrolment legislation including the payment of defined contribution (DC) pension contributions. There is currently no easement or change to the automatic enrolment rules, timescales for contribution payments nor any allowances for a pension contribution holiday for DC schemes, despite some initial speculation within the industry.”

How will the level of contributions into my workplace pension be affected by furlough?

“Alongside 80% of wages up to £2,500 per month per employee, funding provided to employers by the government will also cover the employer’s National Insurance contributions and the minimum employer automatic enrolment pension contribution required by law (making a maximum total of £2,805 per employee, per month available).

“Therefore, unless you are told otherwise, your own pension contributions and your employer’s contribution will continue at the current percentage but will be based on the amount you are paid while on furlough rather than your normal salary.

“Your pension plan may give you the option to reduce or suspend your contributions, or to opt out of the plan altogether. But think carefully before taking any of these options as they could have a sizeable impact on the value of your pension savings when you come to retire.”

Can my employer reduce the contributions they make to my pension?

“Some employees will previously have benefited from their employer paying more than the minimum legal pension contribution (3% of Qualifying Earnings which is currently earnings between £6,240 and £50,000 per year).

“Under the Job Retention Scheme the government will only fund the cost of that minimum legal employer contribution and employers have to cover the cost of any gap up to their committed contribution rate.

“For employers struggling to afford contributions above the automatic enrolment minimums, The Pensions Regulator (TPR) has introduced a temporary easement to allow an employer to reduce its contributions to no less than the automatic enrolment minimum levels for furlough staff only without the need for the usual 60-day consultation process.  This easement applies where contributions are to be reduced only for the time an employee is on furlough.”

Will I be taxed on the money I receive? Equally, will I receive pensions tax relief on my contributions?

“Your furlough payment will be taxable as income in the usual way. Whether you actually pay tax on it will depend on your personal circumstances – how much you earn and what tax allowances you have. If you receive the full £2,500 a month, it is highly likely that you will pay tax on it. You will also pay National Insurance contributions, student loan repayments and any other usual deductions.

“Tax relief on pension contributions will continue as normal with basic rate taxpayers receiving a 20% top-up from the government.”

How long will the scheme cover wages/pension contributions?

“According to the latest government guidelines the job retention scheme will be in place for four months – backdated until the start of March – but may be extended.”

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