Furlough has been more damaging to savers’ pension contributions than their wages, with low earners being hit the hardest, according to Now: Pensions.
Analysis from the workplace pension provider has found the effect of furlough saw pensions reduced by more than a quarter, whereas wages were typically cut by 20 per cent.
This was because the first £120 of weekly furlough pay did not count for pension purposes, Now: Pensions said.
For example, a worker who was earning £400 per week before furlough would have received £8.40 in pension contributions from their employer, but under furlough this fell to just £6, a reduction of more than a quarter.
Another blow to pensions was that about 250,000 people were forced into the net pay anomaly band as a result of furlough and receiving lower wages.
Those impacted by this anomaly lost out on up to £64 of take home pay every year because of the way in which their contributions were calculated.
The net pay anomaly occurs in the pensions tax relief system and means low earners are missing out on a 20 per cent boost on their pension contributions if their scheme operates a net pay arrangement, which are the majority of pension funds in the market.
This is because they are not granted tax relief on their contributions if they do not pay income tax. Conversely members of pension scheme that operate on a relief-at-source basis are granted basic rate tax relief of 20 per cent on pension contributions up to £2,880 a year.
Adrian Boulding, director of policy at Now: Pensions said: “It’s becoming extremely visible that women are being hit harder by this pandemic when it comes to their finances and will continue to be disproportionately impacted as the economic crisis unravels.
“It seems to be an accident of the system, but by excluding the first £120 per week from pension contributions, the furlough scheme has caused a big reduction in contributions going into worker's pension plans.
“The way the maths works, this reduction is largest for those on low pay or part time work, and as these are often women it is widening the gender pension gap.”
He added: “The net pay anomaly is a quirk of the tax system which the Conservative Party included a review into in their 2019 general election manifesto.
"We are urgently calling for the government to not ignore this tax kink which is hurting our lowest earners and becoming a growing problem as more people’s livelihoods and jobs are hit by the pandemic.”
Last week it was revealed that Covid-19 had impacted the publication date of the call for evidence to address the net pay anomaly, with the government expected to provide more information “in due course”.
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