Four months in and 2020 is taking no prisoners. The Coronavirus outbreak has changed life as we know it. You may have swapped your contemporary office space for your kitchen table or find yourself splitting your day between team meetings and teaching maths.
The ripple effect from the lockdown and restricted travel measures brought in to reduce the spread of the disease have had a substantial effect on all industry sectors. A lot of companies have been severely affected by the reduced activity in the UK. It could be that they have had to temporarily cease trading or make significant changes to staffing levels to get through these difficult times. In an effort to protect jobs in those circumstances, the government has introduced the Coronavirus Job Retention Scheme.
If you work for a company who are struggling and cannot afford to keep you on during the current lockdown, they can put you on ‘furlough’. If you have been placed on furlough or are expecting to be in the near future, you may be asking yourself ‘what is furlough?’ or ‘how does furlough work?’
To help you answer this, we’ve put together some furlough information for you. Beyond what this scheme means for your immediate financial concerns, you may also have questions about its long-term implications - including what it means for your workplace pension savings. We try to address some of those questions and concerns here, based upon current understanding of the Government Scheme.
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
The most important thing you must do if you are going, or already on government furlough is to make sure you read the agreement and speak to your employer if you have any questions.
For more information that may help define furlough and what it means to you, visit our furlough information page.
Important information: The value of investments can go down as well as up, so you may not get back the amount you originally invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in a pension and tax treatment depends on personal circumstances and all tax rules may change. You can't normally access money in a pension until 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.