Is maternity pay pensionable?
What happens to someone’s private or company pension when they go on maternity leave?
Due to Auto-Enrolment, all employers have to enrol their staff into a company pension scheme and contribute at least 3% of their annual salary to the pension each year.
And when taking maternity leave, an employee is allowed to benefit from all the things they usually would such as paid holiday, employee protection from unfair dismissal, employee benefits – and employer pension contributions.
So, we’ve established the employee should receive the same benefits they normally would when working. But how their pension works depends on the type of pension scheme the employee is part of.
There are two you need to know:
Defined benefit scheme / final salary pension
This type of pension tends to be used by the public sector or old pension schemes, and the company will pay a retirement income based on the person’s salary and time they’ve spent with their employer.
In this case, when taking paid maternity or paternity leave, the employee will continue to build an entitlement to their pension like they would when working.
If they decide to take extra unpaid leave, this is classed as ‘non-pensionable service’, and this won’t count towards their pensionable earnings.
The employee will still be enrolled into the pension scheme no matter what type of leave they take though, and won’t be kicked out of the scheme if they do some non-pensionable service.
Defined contribution scheme / money purchase pension
This is the most common form of pension type and is when an employer and employee both contribute into the pension pot, so the money is built up over time.
While the employee takes paid maternity or paternity leave, both employee and employer will continue paying into the pot. How much, you ask? We’ll get into that in a second.
If the employee decides to take extra unpaid leave, they don’t have to contribute to their pension. In which case, you as the employer won’t either (unless it’s written into their contract that you should).
How much do employers contribute to a money purchase pension?
When an employee goes on paid maternity leave, the employer will still pay the same percentage of contribution that they did immediately before the period of maternity.
So let’s say in the month before your employee Jessica took leave, you contributed 5% of her full salary to her pension, which equalled £200 a month. You would still pay that amount every month throughout the whole period Jessica’s on paid maternity leave. This is the case even if Jessica’s pay reduces or stops during the leave period.
Happily, the same goes for paternity or adoption leave, so there’s less to remember!
How much do employees contribute?
An employee’s contributions will be based on their actual earnings – as opposed to their earnings before they leave.
That means their contribution level may fall over the duration of their maternity leave, if they don’t choose to increase their payments.
Do employees have to make pension contributions when on maternity leave?
No, it isn’t compulsory for employees to make pension contributions when on leave. If they would prefer not to then they must notify their employer before they take leave.
What happens if the employer fails to take contributions during an employee’s maternity leave?
If an employer fails to put what they owe into the pension pot, or makes a miscalculation, contributions can be repaid after the fact within a reasonable timescale.
Can an employee change their mind?
If the employee says that they don’t want to make pension contributions, but then changes their mind when they return from leave and want to make up for it, employer must also contribute the correct amount and backdate the contributions.
What happens to their pension if the employee on maternity leave does not want to return to work?
Just the same as if anyone else decides to leave your business, their pension pot will remain untouched with their pension provider until they retire. They can then choose to keep their pension as it is or move it to a different provider.