The UK Furlough Scheme’s Surprising Effect on Insurers & Pensions
The UK “furlough scheme,” a wage subsidy for more than nine million workers affected by COVID-19 business shutdowns, has been extended through the autumn and will cost a fortune.
Millions of “furloughed” employees in the UK have received 80 percent of their salary – up to a maximum of £2,500 per month – so that employers can retain their staff, while not depleting their financial resources.
The Guardian reports that the total cost of the scheme could amount to more than £80bn, according to Paul Johnson, director of the Institute for Fiscal Studies:
“To put that in context, in eight months, that is more than we spend on the education system in an entire year, it’s many times what we spend on the police, it’s many times more than we spend on social care, it’s about half what we spend on the whole NHS in a year.”
How Will the Government Afford This?
One obvious target is pensions savings, considering the government has had its eye on the tax advantages afforded to pensions savings over the years.
The Association of British Insurers recently commissioned the Pensions Policy Institute to assess the current system and who benefits from it. Some notable findings:
“The cost of income tax relief on pension contributions has increased from £14bn at the beginning of the millennium to over £30bn in recent years.
When including the cost of national insurance contribution relief, the cost to the government was over £53bn in 2017-18.
Over this period HM Revenue and Customs income tax receipts have risen from £108bn to £180bn, a slower rate of increase.”
The current tax privileges have been advantageous for workers and pensioners. They include:
- The ability to take up to 25% of one’s accumulated pension fund free of any UK taxes
- The remaining amount can stay invested with tax free growth and the owner can draw down on this amount
- On death, any remaining amount is paid to dependents without any tax liability
- Contributions to the fund are taken from taxed income, but paid in net according to the basic tax rate (which is currently 20%). So if you pay in £800, the pensions administrator will “gross the payment up” to £1,000 (add the basic rate tax to the contribution before investing it). This even occurs during a period where you are not paying tax…it’s free money)
- Those who pay higher rates of tax can also claim the excess though their annual tax returns
The Impact on Insurers
It wouldn’t be a surprise if these privileges are restricted soon, to make up for the expense of the massive furlough scheme. This would trigger a rush of workers and pensioners trying to take advantage of these privileges before they expire.
Insurers should be prepared for a sudden surge in transactions geared to getting hold of this tax-free money ASAP. This will require agile processing and product configuration abilities, along with digital and self-service capabilities, to streamline the involved processes and maintain the customer experience. The time to start preparing is now, before the sales advice activity really starts ramping up.
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Dave Punter David Punter is an insurance practice consultant at Sapiens. He possesses nearly a quarter century of experience helping insurers, particularly in the life & pension sector, maximize their technology, automate processes and succeed.