Could Furlough Leave Affect My Pension Contributions?

The outbreak of coronavirus has led to heightened market volatility and thousands of employees being placed on furlough leave – leaving people across the country concerned about the impact this could have on their finances, including their pension fund.

The Government introduced the Coronavirus Job Retention Scheme (CJRS) on Friday 20th March as part of a package of measures to safeguard jobs and alleviate the impact of Covid-19 on businesses across the country.

The scheme enables businesses to recover 80% of wage costs up to £2,500 per month for employees on furlough leave, plus the associated employer National Insurance (NI) contributions and minimum automatic enrolment employer pension contributions on that wage.

Below, we have outlined what could happen to pension contributions if a person is furloughed and whether people should be concerned.

Furlough leave and pension contributions

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% 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.

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.

The CJRS is available from 1 March 2020 and in April, the government confirmed it had extended the scheme for an extra month to 30 June 2020 (previously 31 May). This means that, as it stands at the moment, workers can be placed on furlough leave for a maximum of four months.

For a worker that is furloughed for four months, the employee would receive a total of £162.24 less into their pension when both employer and gross employee contributions are taken into account.

Take an employee aged 35 wanting to retire at their state pension age of 68. If this amount of £162.24 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 £811.72. Therefore, by being furloughed for four months, an employee could lose out on £811.72 within their pension.

If the employee was to buy a single-life annuity at age 68 increasing in line with inflation each year and assuming the annuity rates at age 68 are the same as those available now, they would receive £29 less income each year – or £2.42 less each month.

Although workers who have been placed on furlough leave will only be receiving 80% of their typical income for a maximum of four months (as it stands), as the figures show, by the time it comes to retirement, the amount affected is minimal so pension contributions aren’t something people need to worry about.