Where to get the right support when your income drops during

Katie Eagles and Sarah Pennells, Head of Financial Capability, discuss the impact of a change in income, what that might mean for your pension and what support is available. 

You'll find out:

  • What impact it can have on your pension contributions
  • What to consider if you’re thinking of changing your pension contributions or the income you’re taking from your pension
  • The impact that stockmarket movements might be having on your pension
  • What help and support is available if you’re struggling financially with a reduction in your income
  • The importance of how to spot a scam and how to avoid it.

Hi,  I’m Katie Eagles and I’m joined today by Sarah Pennells, our  Head of Financial Capability.

Hi Katie.

Hi Sarah.

(Katie) Royal London is here to help you as best we can during these difficult times and today we ‘re here  to talk about  the impact of  a reduced income  and what that might mean for your pension.

Now Sarah, many thousands of people across the UK have been furloughed by their employer. Some are still receiving full pay but many are receiving 80% pay from the Government job retention scheme, what does this actually mean for their pension contributions? 

(Sarah) Well, the monthly pay you’ll receive from the job retention scheme will be 80% of what you’re normally paid, up to a maximum of £ 2500 a month.  As you say, some employers have decided to continue paying their employees  full pay while they’re furloughed.

So let’s just look at the contributions from your employer. As part of the money companies receive from the government, they’ll get a payment to cover the minimum level of contributions that they need to make under automatic enrolment. In broad terms, that’s currently 3% of your salary.

That level may be less than your employer currently pays into the pension for you. Importantly, it will be based on the income you earn while you’re furloughed. Your employer can continue  to contribute more than 3%, but they’ll only get 3% from the Government scheme.    

Now I do think this is really good news that the government scheme covers employer contributions, so if you’re in your employer’s scheme you’ll still get those payments, and of course you’ll continue to get tax relief on your contributions, which both really help in terms of the money going into your pension. And tax relief, just to explain that term, simply means that some of the money you’d pay the government in tax is paid into your pension instead.

(Katie) That’s great but do you think it’s fair to say that a lot of people will be struggling financially just now, and they might be thinking about reducing or even stopping pension contributions?  

(Sarah) I think that’s absolutely right, a lot of people will be facing some difficult choices when it comes to their money at the moment. What I would say is that you should think carefully about stopping contributions as it’s very likely to affect the money you have in retirement.

For some people, retirement may seem like a long way away, but it could last for 20 or even 30 years! And of course, if you don’t pay in to your workplace pension, you’ll miss out on your employer contributions and tax relief from the Government. If you do decide that you want to pay less into your pension, you’ll get the clearest idea of how this will affect you if you talk to your financial adviser. If you don’t have a financial adviser but would like to get advice, there’s some useful information on the Royal London  website on how to find a financial adviser.

If that’s not an option, there are some online pension calculators that can be useful. Now you will have  to speak to your employer if you want to make any changes to your pension contributions. 

(Katie) And I guess many people might also be thinking about taking an income from their pension to support them through these difficult times. 

(Sarah) I think that’s right and if you’re 55 then you can start to take money out of your pension but again this is something you should consider really carefully if it is not something that you’ve planned for. 

We’ve seen stock markets around the world  fall considerably over recent weeks and withdrawing money from investments when markets are down tends to be a bad idea because you’re essentially selling your investments at a lower price. And once you’ve taken that money out, you’ve lost the opportunity for the value to go back up again when everything blows over.

Now some people may simply not have the option of waiting for the stock markets to recover before they take money out of their pension. If that’s your situation and you have a financial adviser, talk to them.

If you don’t have an adviser, and want to talk through the options, organisations such as the Pensions Advisory Service or the government led service,  Pension Wise may be able to help. One word of warning I’d like to give, if you take money out of your pension, it may mean you’re not able to claim certain means-tested state benefits, or you may be entitled to less.

(Sarah) Now Katie, I was talking there about investment markets falling, what should people be doing from an investment pint of view with their pension

(Katie) Yes, we know it can be unsettling to see the value of  your pension fall, but it’s important to remember that  pensions are a long term investment and that making decisions based on what’s happening in the short term can be a very risky thing to do. The second most important thing to remember is that in most cases, certainly for most Royal London customers, pensions are invested across a mix of assets to spread the risk and reduce the impact.

Pensions are a long term investment, spanning anywhere between five and 45 years, maybe even longer for some of our younger customers, and so this is about looking beyond this disruption which relative to your investment timeframe, will be short term.

And finally it is worth remembering that there is a team of highly experienced investment professionals who are making decisions on your behalf, aiming to maximise your long term outcomes.

So my suggestion overall would be not to make any rash decisions, but to make sure you’ve taken time to understand all of your options and the pros and cons of those options and this his might mean you need to speak to a financial adviser is you’re not sure.

(Katie) I was going to ask you Sarah any thoughts on areas people can be thinking about if they’ve seen their income fall as a result of being furloughed, being asked to take unpaid leave or even if they’ve been made redundant?

(Sarah) In uncertain times like this, thinking about your financial situation can be really stressful but there are things that you can do that can help. So, I’d split this into three areas, maximising your income, looking at your outgoings and keeping on top of your debts.

So, let’s take maximising your income first: you may not have thought that you were entitled to any benefits but this is definitely an area you should check out.  The charity Turn2Us.org.uk has a benefits calculator on their website that can help you work out what you’re entitled to.

And of course, look at your insurance policies.  If you’re unable to work it may be that you have a policy that can pay part of your income or your mortgage payments.

Next, look at your budget – which is just a record of money coming in and money going out. Some people love having a budget, because it helps them feel in control, and others struggle with it a bit. If you’ve never got round to doing a budget, now could be a really good time to start. You can do your budget by using an app, on a piece of paper or on a spreadsheet. It’s really whatever works for you!

If you’ve not switched energy supplier for a while, have a look and see if you can get a better deal.

The third area to look at is your debt, and that includes anything from credit cards and car finance to your mortgage. Debts that were affordable a few weeks ago could now be causing you to worry if your income has dropped or might drop in the future. 

Financial companies are offering a range of measure to help customers affected by coronavirus, for example, banks, credit card companies, mortgage lenders and car finance providers are offering  a payment freeze of up to 3 months for customers. But you do have to ask for it so don’t just stop your payments. 

(Katie) So to summarise :

  • If you’ve been furloughed , you’ll still receive pension contributions – albeit potentially at a lower level  
  • You might see the value of your pension has gone down, but don’t panic and don’t make any rash decisions. Pensions are long term investments – and it’s very normal for investments to go up and down in value.
  • If you’re considering making any changes to your pension, we strongly recommend that you seek financial advice to consider your options thoroughly before taking any action
  • If you’re struggling with a loss in income, don’t panic there’s lots of support available
  • Be alive to scammers and what you can do to avoid being scammed.

We’re really keen to hear if there are any other topics you’d like to hear from us about, or if you have questions after listening to this podcast. If there are then please get in touch either by emailing us at customeremails@royallondon.com.