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What happens to your pension if you've been furloughed or you've lost your job?

If money has become tight due to the coronavirus outbreak, or you’ve been made redundant, you might be wondering what to do with your pension payments. We take a look at the different options you might have.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Since the hit of the coronavirus pandemic many people will have experienced a drop in income and will be wondering how they can keep their expenses down.

Having food on the table and keeping a roof over your head is what’s important, so essential bills will continue to take priority for most.

If you’re looking to raise more emergency cash, it might be tempting to pause paying into your pension, especially if retirement is a long way off. You should avoid this if you can afford to. You’d be compromising your future retirement fund, and would essentially be giving up a free boost from the government.

This article is not personal advice. If you are unsure of a course of action for your circumstances, please seek advice.

How pension tax relief works

If you have a defined contribution, like a personal or workplace, pension, the government will cover 20% of the amount you want to add in, by adding basic-rate tax relief. For example, say you wanted to make a £10,000 contribution to your pension throughout the year. You’d only need to pay in £8,000, and the government would pay £2,000 of tax relief into your pension. Further tax relief might be reclaimable if you pay tax at a higher rate.

To receive tax relief on your personal contributions, you can only contribute as much as you earn each tax year, or £3,600, whichever is greater. For example, if your salary in the current tax year is £30,000, this is the most you can add across all your pensions and receive tax relief. The maximum amount that can be contributed in total from all sources each tax year is also limited by the annual allowance, which is £40,000 for most people.

Find out more about pension contributions

If you’re part of a workplace pension your employer is also likely to be required to pay into it as well. There’s more on what happens if you’ve been furloughed below.

That’s why we think cutting back on your pension payments should be one of the last things on your list. It’s important to remember though, you won’t be able to access the money in your pension until you’re at least 55 (rising to 57 in 2028).

If you’re a Scottish tax payer, slightly different tax bands and rates apply to your income which could affect how much tax relief you receive. Pension and tax rules change and benefits depend on your personal circumstances.

What happens to my pension payments if I’ve been furloughed?

If you’ve been furloughed your employer can apply for a grant which will cover 80% of your salary, up to £2,500 a month. This is a temporary measure which took effect from 1 March and is now in place until the end of June, but could be extended further if necessary.

As well as your salary, the government will also cover the minimum automatic enrolment pension contribution from the employer. The statutory minimum is 3% of your earnings between £520 – £4,167 a month.

If your employer pays more than the minimum they’ll be required to make up the difference. You’d still need to pay a minimum of 5% to get the government contribution, but this should be automatically taken from your pay if you’re enrolled into your workplace pension scheme.

Redundancy and paying into a pension

If you are made redundant, your immediate concern will probably be finding a new job and you will have important decisions to make. From a pensions point of view, redundancy gives you several choices.

If you have a workplace pension and you’re made redundant by your employer, your pension contributions would typically stop for both you and your employer. Normally you can choose to leave the pension pot as it is or you could consider transferring it to a new pension scheme. You could transfer your pot to a personal pension, like the HL SIPP, or another workplace pension once you start working again.

If you’d like to transfer your existing pension(s) to Hargreaves Lansdown, please first make sure that you won’t be penalised heavily by your current provider, or lose any guarantees or benefits. Pensions are usually transferred as cash meaning you will miss any market rises or falls for a period.

More on transferring

If you’re nearing retirement, and you’ve been made redundant, if you can afford to, you could think about paying some of any redundancy payout into your pension to give it a boost. Remember, to receive tax relief your personal contributions can’t be any higher than your earnings. Any part of your redundancy package which is taxable is likely to be classed as earnings.

More on paying into a pension

What if I have a defined benefit scheme?

As a general rule you should try and stay in a defined benefit (e.g. final salary) scheme at all costs. These types of pensions can be the most generous of all. They pay you a guaranteed income for life when you retire, and may continue to pay to your spouse or civil partner after you’re gone.

If you’ve been made redundant, you will stop building up benefits in your pension, but the benefits will continue to be revalued in line with inflation until they are paid. Once your pension is in payment, it will usually increase in line with inflation too.

Who protects my pension and is it secure?

How we can help you benefit

Now more than ever, it’s important your next steps take you in the right direction. If your confidence has dipped and you need a helping hand, our financial advisers could help you retire on your terms.

The first port of call is our advisory helpdesk. They will explain what benefits you could gain from having financial advice and put you in touch with an adviser, if appropriate. You might even discover it’s not right for you. If that’s the case we’ll support you with free information to help you get yourself on track. If you decide to proceed with advice, there will be a charge that the adviser will discuss with you.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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