Pension contributions are now mandatory for both employees and employers thanks to automatic enrolment. Under the new enrolment rules it may also be possible to get tax relief from the government.
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While many people consider auto enrolment a good thing, some may be worried about how pensions will be affected under new furlough rules.
The new rules state that, so long as the employee and employer both agree, it is possible to place a person on furlough leave which means that 80 percent of their wages will be covered while they stop working.
Fabian Taylor, an Associate and Chartered Financial Planner for Nelsons looked into what will happen to pension contributions if a person is furloughed.
He started by analysing the latest earning figures from the ONS: “According to the Office for National Statistics (ONS), the UK’s median earnings in April 2019 was £30,420. Therefore, monthly average earnings would have been £2,535.
“Assuming an employer uses the qualifying earnings method and pays the minimum employer contribution of 3 percent of salary on a monthly basis, an employee earning an average salary (according to the ONS) would normally receive an employer pension contribution of £60.45 each month.”
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This of course would change if a person was placed on furlough leave as they’ll only receive 80 percent of their wages.
As Fabian continued: “For an employee that is furloughed and receiving 80% of their salary (£2,028 per month if we’re sticking to the average salary), they would receive an employer contribution of £45.24 – which is £15.21 less than they would normally receive. The monthly amount being paid in by the employee (if we’re taking the minimum contribution of 5%) would also reduce from £100.75 to £75.40 – a total reduction of £25.35 each month.
“For a worker that is furloughed for the maximum of three months, the employee would receive a total of £121.68 less into their pension when taking into account both employer and gross employee contributions.”
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These reductions could be even more dramatic when taking into effect long term ramifications.
Many private pensions are invested into the stock market which is supposed to bring in further returns.
Fabian provided some basic calculations for what could happen down the line: “Take an employee aged 35 wanting to retire at their state pension age of 68.
If this amount of £121.68 was to be invested in a pension in the stock market, assuming an annualised growth rate of 5% for 33 years, this would equate to £608.79.
Therefore, by being furloughed for three months, an employee could lose out on £608.79 within their pension.”
Many people will, understandably, be worried about all of their finances at the moment. Pensions, incomes and employment itself are all being affected by coronavirus.
The government has taken steps to remedy this by introducing new rules for mortgage and rental payments, universal credit and income protection but there is further support available.
Impartial organisations such as Pension Wise, the Money Advice Service and Citizens Advice all offer coronavirus themed advice.
Several private companies have also provided free support in recent weeks. An example of this includes the emergence of mortgage holiday calculators which can work out how much a person has to repay if they take one.
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