What should you do about your UK pension if you are made redundant or facing financial difficulty during the virus crisis?
When you are struggling financially, and worried about your job or you are already out of work, you need to prioritise what bills you must pay – food and a roof over your head must come first.
If you are looking to make financial changes during the coronavirus emergency, your pension contributions may be something you will want to look at.
If you are in this situation, the important things to remember are:
• Don’t panic or make rushed decisions – you maybe able to reduce your payment or take a pension contributions holiday.
• Stay careful that you are not being scammed
• you risk a huge tax bill which you will have to pay even if you’ve just lost your life savings.
• Keep paying into pensions if you can afford it, this may be only a short-lived setback to your finances.
Your options are dependant on the type of pension you have.
State pension
The full state pension is currently worth £175.20 per week or around £9110 a year, and when you reach the qualifying age you get guaranteed payments until you die.
It is crucial to maintain your National Insurance record to ensure you retire on a full state pension, or as near to it as possible.
If you remain in work during the current crisis, your National Insurance contributions will be deducted automatically.
If you are made redundant, your National Insurance contributions will stop, so what do you do?
You can make voluntary payments, backdated for six years, but the hopefully this might not turn out to be necessary, remember you need 35 qualifying years for a full state pension.
If you are many years away from retirement, you might judge you will end up with a full record anyway, and don’t need to make voluntary top-ups.
If you are close to retirement, and were contracted out of the second state pension or SERPS during your career, it is important to check your record.
Defined contribution pensions
You have the responsibility for building them up, though employers and the Government pay into them too.
Under the auto-enrolment rules, all workers get signed up for such schemes unless they opt out.
If you are short of money right now, it might be tempting to leave, but you should avoid this if possible so you don’t damage your future pension prospects.
The Government’s emergency help for employers during the current crisis includes supporting their pension contributions into individual workers pensions.
Meanwhile, if you are made redundant, you might be able to continue paying into your existing pension scheme. If your defined contribution work pension scheme is run by an external pension firm this will be permitted, but not if it is run in-house by a board of trustees.
It is still possible to pay in pay in up to £3,600, including tax relief.
With a trustee-run work pension schemes, you can’t keep paying in after being made redundant.
Redundancy payments can normally only be paid as pension contributions into occupational pension schemes while people continue to be paid by their employer.
If you can’t use your old work scheme but still want to pay into a pension before you get another job, you can use a scheme such as NEST, designed to be a cheap and simple alternative for employers when auto-enrolment was launched, and which is open to the self-employed.
Final salary pensions
After retirement, Final Salary Pensions pay a guaranteed income for life. They also pay a reduced income to your spouse or civil partner if you die before them.
Also known as Defined Benefit pensions, most in the private sector closed to new contributions long ago, but those in the public sector remain open.
If you are still working but getting into financial difficulties – perhaps because a partner has lost income or their job – you should try to stay in a final salary scheme if at all possible.
Call the scheme beforehand to ask questions about what it might mean if you stopped contributions – including whether you will be allowed to re-join later.
In some Defined Benefit schemes it may be possible for employees to take a contribution holiday without opting out. In that scenario the employee would not build up any benefit for the period when contributions are suspended but may be able to make up the gap at a later date.
Any workers made redundant from an employer with a final salary pension scheme, should check with their employer to understand whether any special redundancy provisions apply. The administrator of the scheme can explain all your options.