If you have been furloughed, the auto-enrolment contributions made by your employer will be covered by the government’s Coronavirus Job Retention Scheme. This is good news for your employer. For you, however, the amount the government contribute is capped to the 3% auto-enrolment contributions. This is based on your furloughed salary or capped at £2,500 a month, whichever is the lower. You are still required to make a 5% contribution from your qualifying earnings.
If you are earning £50,000 a year and contributing the minimum amount into an auto-enrolment pension for 2020/21. Your pension contributions a month would be £291.73, made up of £109.40 from your employer and £183.33 from your contribution.
By contrast on a capped monthly furloughed income of £2,500 your pension contribution would drop to £158.40.
You can follow this link to the Money Advice Service and use their Workplace Pension Contribution Calculator, and enter your salary.
So, you could see your pension contributions drop significantly.
You have the option of pausing your pension contributions. However, you can’t pause your pension contributions and still get your employers contribution. Also, if you pay less than the minimum auto-enrolment contribution, you lose the right to your employer’s contributions. This is the same regardless of whether you are furloughed or not.
By stopping your contributions, you are turning down free money in the form of your matched employer contribution, as well as the additional boost of pension tax relief. Additionally, once the money has gone into your pension, the money is yours, even if you lose your job.
Suspending your pension contributions may feel like an easy way to save money but it is a decision that should never be taken lightly. You can pause your auto-enrolment pension contributions at any time, but there are downsides to this money-saving tactic.
First, look at cutting out all the luxuries you don’t need, and shop around to cut the cost of essentials. Write down a monthly budget and see if you can reasonably cut costs anywhere else before turning to your workplace pension contributions.
However, for some people pausing contributions for a few months may make sense. If you are working, but other people in the household have seen their income reduce or have lost their job and you still have trouble covering the essentials.
Pausing pension payments should come before getting in touch with companies you owe money to requesting payment holidays or reduced payment plans, as this will affect your credit score in the future.
If you do decide to stop your contributions keep the break as short as possible to avoid damaging your future retirement plans. Remember, that if you do pause your pension contributions you can ask your employer to allow you to opt back in at any time, and restart paying contributions. As soon as you do this, you will start receiving your employer’s contribution again as well.
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The information contained in this article is for information purposes only and does constitute advice. No action should be taken on this information alone.