Furlough pay is given to members of the UK workforce where business has been significantly affected by the coronavirus pandemic. Sectors such as hospitality and retail came to a crashing halt when a lockdown was enforced, forcing these businesses to close their doors. But what exactly happens to your pension pots if you are furloughed?
The Chancellor of the Exchequer Rishi Sunak last week confirmed a quarter of the UK employment market are now receiving furlough pay.
This equates to a staggering 7.5 million workers whose jobs the Government hopes it has protected through the Coronavirus Job Retention Scheme.
The Government’s scheme sees businesses apply for grants to cover 80 percent of an employee’s salary up to £2,500 plus National Insurance and pension contributions.
However, some have raised concerns about how the Government’s furlough pay compares to their typical pension arrangements and the subsequent long-term impact on their pensions.
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Until the end of July, the Government will cover salaries up to £2,500 a month which is equivalent to the UK average annual salary of £30,000.
The scheme will also replace a three percent employer contribution into staff pension pots on earnings between £520 and £2,500 a month.
The Government’s furlough scheme will only match the usual employer contribution to three percent, even if this amount is usually higher.
Under current laws, UK employees aged older than 22 earning more than £10,000 a year are automatically opted into a workplace pension scheme.
This essentially means a portion of their salary is saved into a pension chosen by their company.
The Government and employers then top up these payments to incentivise employees to save for their pensions.
The current rules require employees to pay in five percent of their salary and their employers to pay in three percent.
The rules differ if you are on a defined benefit pension scheme which is also known as a final salary scheme and do not apply to those who are self-employed.
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Workers can opt-out of the auto-enrolment scheme.
However, they are often advised to continue to pay into pensions to guarantee their comfort in retirement.
The current State Pension amounts to just £9,110 a year and not everyone is eligible for the full State Pension amount.
Only those who have reached State Pension age and made the necessary National Insurance contributions throughout their lives can receive this payment.
Pension contributions will potentially be affected by the furlough period.
Financial experts advise continuing to pay into your pension if you can afford to do so.
Unless you continue paying at least the auto-enrolment minimum of 4 percent of salary into your pension, you will lose out on free Government cash topping this up to eight percent.
You should also avoid harming your chances of a comfortable retirement because of what might be a serious but short-lived setback to your finances.
Legally, employers are required to continue paying into a pension scheme for members of staff.
Some workers will previously have benefitted from their company paying above the Government’s statutory requirements.
Maike Currie, director for workplace investing at Fidelity International, said the Government will only fund the cost of the minimum legal employer contribution at three percent and employers have to cover the cost of any additional payments.
Employers struggling to meet these contribution amounts may opt to temporarily scale back payments.
But once an employer returns to work and is taken off furlough these payments should revert to their original amounts.
Any firm with more than 50 staff which desires to permanently reduce their pension contributions, is required to undertake a 60-day consultation process by the Pensions Regulator.
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