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Job retention scheme & auto-enrolment contributions up to 3%

The job retention scheme will give those who may otherwise have faced unemployment in the current crisis a steady income, providing as much as 80% of your usual wages, with employers having the option to increase this amount to your full monthly income.

The recent news that government grants would also allow for auto-enrolment contributions, up to the statutory amount of 3%, was welcomed by the UK pensions industry who had expressed concern that those already facing a lower income could now also face a blow to their pension.

However, many of those worst hit by the current crisis are likely to be existing low earners, and are therefore still likely to miss out on these crucial auto-enrolment contributions.

As pension contributions under the job retention scheme are done on the basis of employees’ furloughed wages, often at 80% salary, the normal salary threshold for auto-enrolment contributions has effectively risen to £12,500 for furloughed employees.

But some savers won’t receive the pension they would otherwise be due, with lower earners facing a reduction in contributions should they fall below the £10,000 threshold and losing out on potentially months’ worth of not only their own contributions, but the contributions they would have otherwise received from their employer.

If workers on furlough earn less than £10,000 per year or the monthly equivalent, this does not mean they drop out of the pension scheme.It simply means that this is a month when the employer and employee have no duty under automatic enrolment legislation to make contributions.

If the employer has made a contractual commitment to pay a certain percentage rate of pension contributions, this contractual duty will continue to apply, but at the new lower salary.

Industry experts had called for the minimum threshold to be lowered in the past, with The People’s Pension predicting earlier this year that a reduction to £6,000 would see an additional 1.2 million people saving for their future.

The Department for Work and Pensions own automatic enrolment review proposed the complete removal of a lower earnings limit. But these changes were never put in place, and whilst the government had committed to a ‘mid 2020’s’ timeline for further auto-enrolment developments, designed to support lower earners, it seems likely that this could be pushed even further away.

When the current crisis is over, the pensions industry will have a chance to support low earners whose contributions were hit in rebuilding their retirement income. There will be barriers to overcome, such as the money purchase annual allowance, and it will be up to the industry to remove these hurdles.

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