I’m one of a number of employees at my firm who could be ‘furloughed’ for up to three months. I currently earn £50,000 and want to know what it’ll mean for my workplace pension (I’m currently paying in the legal minimum under automatic enrolment).

Christopher

Tom Selby, AJ Bell Senior Analyst says:

As part of its emergency response to the Coronavirus pandemic, the Government has pledged to pay up to 80% of the salaries of workers who are temporarily ‘furloughed’, up to a maximum of £2,500 a month (equivalent to £30,000 a year).

Under the ‘Coronavirus Job Retention Scheme’, these employees will remain on the company payroll but will essentially be on leave during their furloughed period. The Government has confirmed the grants will also cover automatic enrolment pension contributions up to the statutory minimum.

At the moment, those who qualify for auto-enrolment will see a minimum of 8% of ‘relevant earnings’ paid into their workplace scheme. This comprises a 4% personal contribution, a 3% employer contribution and 1% in tax relief. ‘Relevant earnings’ for 2020/21 are all earnings between £6,240 and £50,000.

Where someone is furloughed, the Government has said it will front-up the cost of the employer contribution, although this will be based on the lower furloughed wages (rather than your previous higher wages) and the minimum automatic enrolment contribution.

Someone earning £50,000 in 2020/21 and paying in at the auto-enrolment minimum would normally expect to see £292 per month paid into their company pension, while someone earning £30,000 and paying in
the minimum would contribute £158 a month.

If both employees were furloughed under the Job Retention Scheme, the person who previously earned £50,000 would see their salary drop to £30,000 (equivalent to £2,500 a month) and their total pension contribution fall by £134 to £158 a month.

The person previously earning £30,000, meanwhile, would see a fall in their salary to 80% (£24,000) and therefore also a fall in their monthly contributions by £40 to £118.

While clearly any fall in the free money available from your employer through auto-enrolment isn’t ideal, these are exceptional circumstances and these measures should be temporary.

Furthermore, in the context of saving for retirement – a process which takes decades – you should have plenty of time to make up for a few months of reduced contributions.

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Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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