Interactive Investor

Managing your personal finances in the face of redundancy or furlough

We take a look at some of the key things to consider if you are faced with a period of reduced pay, unpa…

31st March 2020 10:37

Tom Bailey from interactive investor

We take a look at some of the key things to consider if you are faced with a period of reduced pay, unpaid leave, furlough or redundancy.

With the economy in shutdown due to coronavirus, many companies have seen their revenues plummet. As a result, many employees now face the prospect of redundancy or reduced pay.

As Quilter financial planning expert Rachael Griffin notes: “This is a deeply concerning period for so many people across the country. Many are worried about their health and the well-being of their friends and family, but also the long-term financial impact on their household.

“Regrettably, some businesses will face severe challenges. Although we hope that measures to protect jobs will help to minimise the damage, some people may be asked to take a period of unpaid leave, reduce or waive some of their pay and benefits, be placed on furlough, or accept redundancy.”

Below, we take a look at some of the key things to consider if you are faced with a period of reduced pay, unpaid leave, furlough or redundancy.

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Are you covered by the government furlough scheme?

A lot of employers are encouraging workers to go on furlough, due to the government’s pledge to guarantee 80% of pay for many workers.

Under the government grant scheme, workers are asked to leave work but will stay on the payroll, with the government paying 80% of their pay.

According to Jonathan Watts-Lay from WEALTH at work: “The rules are very strict. If you are furloughed, you literally cannot work. If you are sitting at home with a laptop, you have to switch it off.”

Companies can place an employee on furlough for a minimum of three weeks at a time. While the scheme is currently set to run only to May, it may continue longer, in which case employees could see themselves brought on and off furlough.

How much will you be paid while on furlough?

As mentioned, the government will guarantee up to 80% of your pay in grants to your employer. This, however, is capped at £2,500 per month – the net monthly pay of those on £37,500.

If you earn below that, you are guaranteed to earn at least 80% during the time you are furloughed. That means you could be taking a fifth less every month. However, some employers have also opted to top up the pay of those on furlough so that they are earning their full usual pay.

If you are above £37,500 and are furloughed, you will receive the monthly maximum amount of £2,500, which for some could be a significant hit to their usual earnings.

As Watts-Lay says: “Those on a higher salary are proportionally worse off.” He notes that while employers do have the option to top up salaries, they are not obliged.

Pension contributions

Employees should determine if there will be any impact on their pension from a period of unpaid leave or reduced earnings.

Those who have been made redundant will no longer be contributing to a workplace pension. However, some may make a regular contribution to a Sipp. Depending on their circumstances, they may wish to pause this.

Those on furlough can choose whether to continue paying into their pension while facing potentially reduced income. The minimum contribution rate is currently 8% of earnings (known as qualifying earnings), of which at least 3% comes from the employer. This will still be paid. However, the actual sum paid will drop if your earnings are reduced and the percentage paid stays the same.

While auto-enrolment means that companies are not legally allowed to choose to suspend pension contributions, employees are able to do so. This is known as a “pension holiday.” This, however, means you will no longer receive your employer’s pension contribution, so effectively you receive less remuneration in total from your employer.

Another option would be to reduce your contributions. As Watts-Lay notes: “It is up to the employee. Some may say they haven’t got enough money and decide not to pay for the period. Others may be contributing 10%, more than needed, and wish to drop it to a smaller amount.”

Income protection policies

If you are made redundant, another important step is to check the terms of your income protection policy, should you have one.

In most cases these policies cover income if you have to stop work because of illness or disability. A few will also cover you if you have been made redundant, but they are relatively rare.

Note also that they may only pay out if redundancy was enforced, and you won’t be able to claim if you accepted an offer voluntarily.

Even if your claim is valid, payments typically do not kick in immediately, so check how long you’ll have to wait before the money comes through.

The amount you can claim under a policy is also variable. Often they are based on your average earnings over the last year, so any sum paid out would be reduced if you had a period of reduced pay within that timeframe.

Check your other policies

It is now common to have medical insurance, critical illness and other forms of insurance provided as a benefit by your employer.

If you’re on furlough, check whether the cover will be maintained or suspended. If it’s paid through a deduction made from your salary, you may lose the cover if you are unpaid.

Quilter Financial Planning proposition director Charlotte Nixon notes: “As well as the loss of income, there are other financial considerations to think about if you are made redundant or experience a reduction in earnings from employment.

“Many employers offer life cover, critical illness and income protection as part of the overall employee reward package, so find out if you will lose those benefits."

This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.

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