Most people know that starting a family can be expensive, but some of the potential costs are more obvious than others.
One issue that commonly goes well under the radar is the impact that taking maternity leave can have on an employee’s pension provision.
Although employees giving birth nowadays benefit from robust employment law safeguards, these won’t necessarily prevent a significant funding shortfall – especially if they end up having several children.
Because people typically take maternity leave in their 30s, any drop in pension contributions during that time will be amplified by the fact that the money could have had over 30 years in which to grow and compound up before they reach retirement.
But this is all so easy to overlook when new mothers are preoccupied with coping with their new responsibilities on limited sleep and their employers are focused on securing suitable maternity cover.
The legal situation
Employees on maternity leave continue to qualify for all their normal benefits such as paid holiday, health insurance covers and – unless they have opted out of the pension scheme — regular workplace pension contributions from their employer.
If the employee at least receives Statutory Maternity Pay, their employer has to keep paying into their workplace pension for 39 weeks and, depending on what has been agreed in their contract of employment, possibly even longer.
These employer contributions will normally be based on the salary the employee received before starting maternity leave and, if the employee’s own contributions are being matched, will need to be paid at the same level they were originally making.
Due to auto-enrolment rules, employees who don’t opt out are also expected to continue paying into their pension whilst on maternity leave. But, unless they specifically choose to increase them, their contributions may be lower than when they were working because they will be based on their actual earnings during this period.
Under Statutory Maternity Pay, an employee currently receives 90% of their average weekly earnings (before tax) for the first six weeks then the lower of £156.66 or 90% of their average weekly earnings for the next 33 weeks.
The surest way of preventing any pension shortfall at retirement is for employees to make some additional pension contributions when they return to work.
However, in our experience this rarely happens without a little prompting because workplace pensions are well down the list of priorities of most new mothers – who tend to forget about virtually everything other than their child.
So, we recommend that employers should add this issue to the list of things they discuss with employees when they return from maternity leave.
The salary exchange problem
Employers who use a salary exchange arrangement for their pension scheme should also be aware of the complications this can cause during maternity leave.
Salary exchange involves employees electing to give up part of their salary so that the employer can pay this into their pension along with its own scheme contributions enabling employees to pay less Income Tax and National Insurance (NI) and employers also to pay less NI.
But, because it’s illegal for employers to make deductions from Statutory Maternity Pay, they may have to continue making these additional contributions without receiving the salary deduction in exchange.
Additionally, the employee, because they have opted to reduce their salary via salary exchange, may fail to qualify for the maximum Statutory Maternity Pay – which is based on gross salary.
For these reasons, removing the employee from the salary exchange arrangement prior to the commencement of maternity leave can benefit both parties.
Horses for courses
But differing attitudes and circumstances can determine whatever action is taken. Some employers feel that the significant value that salary exchange can create for both employer and employee outweighs any negative effects it might have on pensions during maternity leave.
Some employers also provide more than the minimum Statutory Maternity Pay for employees, particularly for their longer serving members of staff. And some returning employees may feel they simply can’t afford to make any pension top ups.
Figures states relate to the 2022/23 tax year and are subject to change in subsequent years.
Content correct at the time of writing and is intended for general information only and should not be construed as advice.