Pension warning for employees hit by Covid crisis as they face missing out on thousands

Martin Lewis gives advice on auto-enrolment pensions

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People who opted out of their workplace pension for one year could have missed out on adding thousands of pounds to their retirement pot, due to more emphasis being placed on short-term financial matters during the difficult economic times of the pandemic. By not opting back in or not checking whether one needs to opt back in, they could unknowingly lose thousands more in pension savings.

With the end of the furlough scheme due to come into effect at the end of September, wealth management firm Quilter is urging people who opted out of making pension contributions to opt-in should they return to full-time employment.

The Coronavirus Job Retention Scheme saw people who were furloughed receive 80 percent of salary, up to a maximum of £2,500 per month, with specific rules relating to pension contributions. The level of support for employer contributions has varied since the scheme was introduced, but employees had to make their pension contributions from the pay they received.

However, the onset of the pandemic saw people either reduce their pension contributions, either voluntarily or because of reduced pay, or opt out altogether. Official figures from the Office for National Statistics showed a fall of 11 percent in employee contributions between the first and second quarters of 2020.

Meanwhile, Nest, the pension scheme set up by the Government to help facilitate auto-enrolment, saw opt-outs reach 11 percent during the pandemic, up from eight percent earlier in 2020.

However, those who do return to full-time employment following the end of furlough should make sure they check their pension status, as they could be missing out on valuable benefits.

Calculations carried out by Quilter have found that for someone earning the average UK salary, their pot would have missed out on £2,271 worth of contributions if they had chosen to opt out of pension savings during the period furlough has been available. If they don’t take any action for another year, then that figure grows to £4,289.

The 25–34-year-old cohort in particular saw the greatest number of people put on furlough during the pandemic, which may have impacted their ability to save for retirement.

If they had been placed on furlough and had chosen to stay opted in to their pension scheme, a 30-year-old earning the average UK salary, would see their pot be worth £5,848 by the time they are 55 as a result of the investment growth of these contributions. If they waited a further year to return to pension saving, then that figure grows to £10,795.

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There are currently 1.6 million people still on furlough in the UK, down from a peak of 8.9 million in May 2020.

Jon Greer, head of retirement policy at Quilter commented on the findings and urged Britons to check their pension status as they return to full-time work. He said: “The onset of the pandemic and the subsequent financial insecurity, that many will have felt, will have caused some to put a pause on their pension saving.

“For some this will have been an understandable decision and will have kept them afloat financially during what has been a very challenging time.

“However, with furlough coming to an end after 18 months it is important for those that are returning to full-time employment who opted out not to forgot to opt back into their company pension scheme.

“Employees may not be prompted to return to saving for their retirement immediately, so it is important they do not lose sight of it and put it on the backburner. Even those who have already returned from furlough should be reviewing their pension contributions, and it is good practice to do this at least once a year.”

Mr Greer warned that employees in the UK should not be tempted to defer opting back in to their workplace pension in order to preserve more of their cash in the short-term, as this could have consequences down the road.

He said: “Given the challenges with the cost of living that are arising, such as increasing food and energy costs, it might feel prudent to put off opting back into your pension and take home more money today, but it is really important to start contributing as early as you’re able to.

“As both your employer and the Government pay into your pension when you do, you are missing out on crucial benefits to help you save for retirement and provide you with a financial lifeline for your future. With these contributions also invested the difference can be stark, as the data shows.

“Auto-enrolment has been a fantastic success, but this success risks being watered down if we leave people behind through little fault of their own. Recent data showed pensions participation through workplaces are now beginning to plateau and as such the Government may be considering whether there is more that they should do.”

Mr Greer also suggested that the Government could increase the flexibility of auto-enrolment to suit people with different personal circumstances and encourage more UK workers to opt in and start building their pension savings.

He said: “Indeed, the Government could consider whether a partial opt-in AE system could boost opt-ins. The current system requires individuals to fully opt in or fully opt out, with little flexibility in-between. If someone needs the extra money, a partial system could allow them to opt-out of their own contributions, while still receiving the employer contributions.

“The Government could target this specifically at the lower paid who may be more likely to opt out entirely. Given this could mean people can still save for their retirement, even if they face short-term financial insecurity today, it is a proposal the Government could look further into and assess whether it would improve participation and overall contributions.”

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