How does the furlough scheme affect pensions?

Mathilda Volant

by , Content Manager

at PensionBee

15 July 2021 /  

15
July 2021

Man in bed turning off bedside alarm.

Furlough has been a lifeline for many businesses and employees, but its had a less generous impact on pensions. As furlough begins to end, find out how the the government-backed scheme affected workplace pensions.

When is the furlough scheme ending?

The furlough scheme will end on the 30th September 2021.

Introduced in March 2020 by the Chancellor, Rishi Sunak, the ‘Coronavirus Job Retention Scheme‘ - or furlough scheme - was intended as a short-term measure to reduce mass redundancies and unemployment.

Yet the scheme has evolved and been extended several times. Initially the government paid 80% of wages (up to £2,500) but from 1st July 2021 this was amended to 70% of wages (up to £2,187.50) with 10% topped up by employers to match the previous 80% payment.

The Self-Employment Income Support Scheme

Instead of the ‘Coronavirus Job Retention Scheme’ for contracted employees, there’s the ‘Self-Employment Income Support Scheme‘ for self-employed people. Similar to the furlough scheme, the Government has extended this - from four to five lump sum grants.

Face a reduction of more than 30% profits and you can claim up to 80% of 3 months’ average profits - with a maximum payout of £7,500. Face a reduction of less than 30% profits and you can claim up to 30% of 3 months’ average profits - with a maximum payout of £2,850.

Covering May 2021 to September 2021, the fifth and final grant is a taxable single installment.

What should I look out for?

As furlough ends, it’s a good time to take a step back and look over your finances. Most people will have noticed a change in their money - up or down - during the 18 month furlough period. Find out how this affected your pension too.

How has the furlough scheme affected my finances?

Income through furlough functions in much the same way as your usual income: you’ll pay your National Insurance contributions, pay off your student debt, and pay into your workplace pension.

The big difference is this is 20% less than you would’ve been paying.

With reduced commuting costs and leisure expenses, some might see they have more spare money since furlough was introduced. Others will find the 80% furlough payment hit their finances harder, so rebuilding savings and security may be a priority.

How has the furlough scheme affected employees?

Around 40% of furloughed employees didn’t get a top up from their employer, meaning that many low-paid workers would be below the minimum wage for their contracted hours. This has a knock-on effect on their finances: with a decrease in savings and an increase in debt.

It’s not all bad news. Unemployment rates are reducing and the reopening of sectors will reintroduce the 100% wages workers were earning before the pandemic.

The goal for all furloughed employees should be getting back in the black and building towards a diverse safety net of financial assets: such as property, pension and savings.

How has the furlough scheme affected self-employed people?

Self-employed people aren’t entitled to employment benefits - such as sick leave. During a health pandemic this had drawbacks.

Another problem is pensions. Self-employed people aren’t required to pay in and around 84% aren’t contributing to a pension besides the State Pension.

Some self-employed people have experienced a significant increase in work. But for those missing out on pay, and pension contributions, their personal finances might be less positive. Ensuring you’re enrolled in a self employed pension is a good first step.

What is the long-term impact on my pension?

The extent to which you’re pension has been impacted by furlough depends on two factors:

  • Did your employer pay you the 80% furlough pay, without any top up?

Example: if you and your employer were paying in £100 a month into your workplace pension, then under the 80% furlough rate you’d only be paying in £80. Over the 18 month furlough period that would equal a loss of £360 to your retirement savings.

  • Did you opt out of your pension, or not contribute to a self-employed pension?

Example: if you and your employer were paying in £100 a month into your workplace pension before furlough, but during furlough you opted out of all contributions, over the 18 month furlough period that would equal a loss of £1,800 to your retirement savings.

Keep up with personal pension contributions

Any loss to your pension savings can be countered with regular or one off contributions, putting you back on course for your retirement goals.

Example: if you’re a basic rate taxpayer and set up a monthly contribution of £12 into your personal pension, you’ll receive £4 in tax relief giving you a £16 a month contribution increase. Over 24 months you’ll have made £360 in contributions, including tax relief.

If you’re looking to manage your money for retirement, consider combining your old pensions into one easy-to-manage online plan with PensionBee - a leading online pension provider.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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