The government has confirmed grants to pay workers’ wages during the coronavirus crisis will also cover employer auto-enrolment (AE) pension contributions.
This forms part of the government’s ‘job retention scheme’ announced last week, in which it agreed to pay 80% of salaries for employees who are asked to stop working but kept on the company payroll – or ‘furloughed’ – during the coronavirus crisis.
The rules – which apply to furloughed staff enrolled into a defined contribution (DC) workplace pension – will see the government pay minimum AE employer contributions worth 3% based on the furloughed salary, which will be capped at £2,500 a month.
What is auto-enrolment?
Auto-enrolment or AE is a government initiative introduced in 2012 that requires all employers in the UK to put their qualifying staff into a workplace pension scheme. You and your employer will pay contributions to your pension, which is then invested and managed by your pension provider until you retire.
You qualify for AE if:
- you aren’t already in a qualifying workplace scheme
- you’re aged at least 22
- you’re below state pension age
- you earn more than £10,000 a year in 2020-21
- you work in the UK
The contributions you and your employer make will be calculated on your ‘qualifying earnings’, which is set between £6,240 and £50,000.
How much are you meant to contribute?
There are minimum contributions you and your employer must pay.
Since last April, total minimum contributions have rested at 8%, with a minimum of 5% paid by you and 3% from your employer.
There are no plans at the moment to increase this, but trade bodies such as the Pensions and Lifetime Savings Association and industry experts argue that at least 12% is required for a decent retirement pot.
Employers may pay more towards staff pensions if they wish, and you can put in extra money, too.
On top of your employer contributions, the government gives you tax relief on your contributions; basic-rate taxpayers get 20% pension tax relief and higher-rate taxpayers can claim 40% pension tax relief.
How will this impact your pension savings?
The promise to pay 80% of salaries for the workers that are kept on during the crisis is a big commitment from the government.
Given the cost, it had been feared that auto-enrolment contributions would be put on ice. However, the government’s commitment to pay some of the pension contributions workers are entitled to during the coronavirus pandemic means pension savings can carry on.
The amount you get in your pension normally depends on how much your employer contributes and how much you earn.
With furloughed staff, the contribution will be set at the minimum 3% and capped at the furloughed salary up to the monthly £2,500 limit. You will still need to pay the 5% contribution to get the government’s contribution.
If your employer contributes above the minimum usually, you could be missing out on a fair bit more. If you’re in a position where you feel you can add in the extra money yourself, you should tell your employer or pension provider you want to up your contributions.
Original Article ‘Government agrees to pay 3% pension contributions for furloughed staff’ written by Kim Kaveh and Published by Which?
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