I’ve been put onto furlough and I pay into my employers Auto Enrolment scheme. What happens to my pension contributions?

I’ve been put onto furlough and I pay into my employers Auto Enrolment scheme. What happens to my pension contributions?

By Keith Martin, Head of Business Applications

 

On 26th March 2020, the UK Government announced the Job Retention Scheme for employers who have had their operations severely affected due to the Covid-19 pandemic. The scheme allows employers to claim 80% of an employee’s salary up to a maximum of £2,500 a month for those employees who otherwise would have been made redundant. The scheme was backdated to start from 1st March 2020 and currently runs for 3 months to 31st May 2020, after which the end date will be reviewed by the government. An employee cannot work for the business during their furloughed period, which has to be for a minimum of 3 weeks.

As part of this scheme, the government will also pay the associated Employer National Insurance contribution and the minimum automatic enrolment employer pension contributions of 3% based on the reduced amount (80% of salary up to £2,500 per month).

 

Pension contributions

 

If your employer currently pays more than 3% as a pension contribution, it is at their discretion if they pay any additional amounts.

It will still be your responsibility to pay your employee contribution. This will be based on the reduced salary although you can elect to contribute more should you wish.

 

The below examples of pensions contributions under this temporary arrangement are based on a 5% employee contribution and a 3% employer contribution.

 

Example 1

Mrs Williams currently earns £42,000 per annum (£3,500 per month gross). As she earns more than the £2,500 cut off amount, her monthly salary is reduced to this amount. Her employer’s pension contribution is reduced from £105.00 to £75.00 for that month and her own employee contribution from £175.00 to £125.00.

 

Example 2

Mr Jackson currently earns £21,000 per annum (£1,750 per month gross). As he earns less than the £2,500 cut off amount, he will have his salary reduced to 80% of its current rate (£1,400 per month). His employer contribution for the month is reduced from £52.50 to £42.00 and his own contribution from £87.50 to £70.00.

 

Note that the salary figures used to calculate the reduction, and therefore the revised pension contribution should not include the cost of non-monetary benefits provided to employees, including taxable Benefits in Kind. Similarly, benefits provided through salary sacrifice schemes (including pension contributions) that reduce an employee’s taxable pay should also not be included in the reference salary. Where the employer provides benefits to furloughed employees, this should be in addition to the wages that must be paid under the terms of the Job Retention Scheme.

It is possible to opt out of your pension scheme however this is not recommended and should only be done after great consideration, as saving for retirement is vital, and by opting out you would not only be cancelling your own contribution, but also that of your employer, as well as the tax relief you gain on your contributions.

 

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