Parental leave and pensions
We are often asked how parental leave impacts workplace pension schemes in terms of funding in general, auto enrolment and salary sacrifice. This article will explain each of these.
- During the period of ordinary and any additional paid parental leave, personal contributions are based on the actual earnings the individual is receiving.
- Employer contributions are based on the level of earnings immediately before parental leave.
- Statutory payments are paid for 39 weeks.
- It’s possible to use salary sacrifice during periods of parental leave but it’s not possible to sacrifice earnings below the statutory minimum.
How does parental leave impact the funding of workplace pension schemes?
A member of a defined contribution scheme can continue to pay contributions during their parental leave. During the period of ordinary and any additional paid parental leave, personal contributions are based on the actual earnings the individual receives. Employer contributions are based on the level of earnings immediately before parental leave. If the employer matches contributions they must match the contributions before parental leave started.
If the individual decides to stop paying contributions, the employer can also stop contributions.
A member of a defined benefit scheme will have any period of paid parental leave counted as pensionable service. This means benefits will continue to accrue as they did before parental leave. Any personal contributions though will be based on the actual earnings the individual is receiving.
If they decide to take a period of unpaid leave after the paid period ends, this will not count as pensionable service. When they return to work, they may be able to pay additional contributions to cover the period of unpaid leave when they weren't contributing.
What we have discussed above are the statutory rules, an employee may have preferential terms under their contract of employment.
What about auto enrolment?
If a member of an auto enrolment scheme goes on parental leave, they can continue to pay contributions during their parental leave. During the period of paid parental leave, personal contributions will be based on the actual earnings the individual is receiving. Employer contributions will be based on the level of earnings immediately before parental leave.
What about salary sacrifice?
It is still possible to use salary sacrifice during periods of paid parental leave. But it is not possible to exchange earnings to a level that would lead to a breach of the National Minimum Wage legislation.
An employer needs to be aware that if salary is exchanged for an employer pension contribution, that contribution has to continue if the employee subsequently goes on parental leave. The contributions only need to continue during paid ordinary parental leave and any paid leave from then on.
Is a salary sacrifice agreement covered by pensions tax law?
An effective salary sacrifice arrangement varies the contract of employment. This means it is entirely a matter between the employer and the employee and the agreement is not covered by pensions or tax law.
As with any amendment to an employee’s terms and conditions of employment, it is recommended that expert legal advice is sought to ensure that the agreement achieves the required outcome for all parties.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.