Several of our clients and their employees have been asking about pension contribution holidays, which is understandable due to the uncertainty caused by Covid-19.
Employers still need to pay pension contributions for their furloughed employees. The Coronavirus Job Retention Scheme allows them to reclaim the minimum level of employer pension contributions, equivalent to 3% of qualifying earnings (that’s earnings above £520 a month).
So what can an employer do if their furloughed worker asks to ‘opt-out’ of the workplace pension?
The expression ‘opt-out’ applies to an employee who chooses to leave their workplace pension scheme within one calendar month of being enrolled. Opting-out will result in the employee receiving a refund of contributions deducted.
Employees have the option to leave their current scheme at any time. This also means that their employer is no longer obliged to make pension contributions for them. It is important that any decision to opt out of, or leave, should be taken freely and without being influenced by the employer.
Any employee taking this action may automatically be re-enrolled back into the scheme at their employer’s next three yearly re-enrolment date (unless they have already opted back in).
Certain pension providers will treat leaving the pension scheme as having left employment. In this situation the employee is likely to receive an email or letter from the pension provider stating that they have left employment, even if they haven’t. Not all providers do this so it’s worthwhile checking. Aviva and Aegon, for example, have a ‘pension contribution holiday’ option on their administration portal.
Main points to bear in mind:
- If an employee chooses to stop making contributions they will lose their right to contributions from their employer.
- If they choose to stop making contributions they may have a lower income when they retire.
- An employer cannot ask or force an employee to stop making contributions.
- With the agreement of the employer, they can opt-in to the pension scheme again at any time.
- If they do not opt-in again they may be automatically re-enrolled in about three years.
Employers cannot choose to take a pension contribution holiday. It must be at the request of the employee.
The Pensions Regulator can take action against employers who encourage employees to opt-out or leave their workplace pension scheme.