Pensions, for the most part, are dependent on contributions from the workers holding them. In the modern working world, employees are expected to fund their private pension pots by sacrificing elements of their wages.
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This could be made difficult at the moment as employment has been severely impacted by coronavirus.
The disease has forced governments across the world to limit economic output and business have had to close their doors.
Because of this, millions of people have either had their working hours reduced or lost employment in its entirety.
Rishi Sunak has tried to mitigate these problems by updating furlough rules.
The new rules state that, so long as both the employer and employee agree, the company in question can place the worker “on furlough”.
This means that the employer would pay 80 percent of the workers’ wages through a government funded scheme.
Currently, it is possible to be placed on furlough for up to three months although this may be extended and it will be capped at £2,500 a month.
Being placed on furlough will likely be relieving for staff who may have been worried that the only other option was being let go.
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However, research has found that while income will be protected the same cannot be said about pensions.
Stuart Feast, a Director and Pension Specialist for Zippen, commented on the crazy situation we’ve all found ourselves in: “Every now and then new words appear in our lives.
“Brexit, Coronavirus and, even more recent than Covid 19, furlough. Mrs Malaprop is having a field day with this one.
“But underneath the various misspellings and mispronunciations, this is a word and action that has serious financial ramifications, particularly in respect of our pensions.
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“We now know that the Government intends to pay 80 percent of a furloughed employee’s salary up to £2,500 per month and a similar principle will apply to Employer pension contributions.”
By examining a salary which could be fairly common in London and other big cities, Stuart reveals what could happen to a pensions moving forward: “Putting this into context, an individual on a salary of £30,000 could see their pension drop from £158 to £118 per month and somebody on £50,000 could see an even bigger proportionate reduction from £292 to £158 per month.
“Those Employers who currently pay more than the statutory minimum will be allowed to reduce their contributions to three percent, without censure from The Pensions Regulator.”
Seeing personal pension contributions fall by nearly £300 a month could be a very stressful reality for some people. Fortunately, despite the dire financial situation, workers are not bereft of choices.
Stuart went on to provide some encouraging words of advice: “The question is what to do about this shortfall? First and foremost, make sure you carry on making your minimum contribution of five percent, regardless of the financial difficulty, otherwise you will lose the Employer contribution as well.
“This is easier said than done but try to remind yourself that it’s actually a four percent contribution not a five percent contribution because you will receive tax relief.
“Also, remind yourself that the Stock Market has fallen significantly since the start of the Coronavirus and therefore the longer term financial rewards for sticking with it will be even greater than normal when the Market recovers. Each contribution you make now will give you better long term value for money.
“There is also one other, and probably, as yet, not considered reason why you should try and keep up your pension payments.
“Pension providers of Auto Enrolment Schemes are all struggling with their administration during these unprecedented times.
“If you opt out now and then wish to re-join, expect significant delays and difficulties getting your and your Employer’s pension contributions back to normal. You will not regret keeping up your contributions, however difficult during this period.”
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