Money: Salary is not the only fruit

The Fixers
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IN THE 1970s classic "Big Yellow Taxi", Joni Mitchell sang: "You don't know what you've got till it's gone." This principle can be applied to numerous things in life, including the undervalued world of employee benefits.

Many people receive valuable benefits as part of their remuneration package, such as a pension, life cover and private medical insurance. It is possible to implement such arrangements privately, but the cost can be prohibitive.

This was brought home to me recently with a series of meetings I had with Rebecca, 33, who has been a nurse with the NHS all her working life. Rebecca was considering accepting a new post in a private nursing home, which offered her a marginally higher salary than her current NHS post, but no additional pension benefits. What would it cost to replace the pension benefits she enjoyed with the NHS?

As an NHS employee she is a member of the NHS Superannuation Scheme, which provides her with an excellent pension scheme as well as death in service life cover. The cost to Rebecca of these benefits is 6 per cent of her gross salary. In reality, the cost of providing these benefits is much higher (estimates put it in the region of 20 per cent of overall pay), with the balance funded by the NHS.

I explained that as the private nursing home in question did not have an occupational pension scheme, she would need to start paying into a personal pension. This is a different type of retirement scheme than she enjoyed with the NHS, and as such, the two are not directly comparable.

The NHS Pension Scheme is a final salary pension scheme, which means the retirement benefits are predictable, based on a formula involving length of service and eventual salary level. With a personal pension, retirement benefits are less certain and will depend on factors such as investment returns over the period to retirement, and annuity rates at the point of retirement.

The amount an individual is permitted to contribute to a personal pension is governed by age and earnings. At 33, Rebecca may contribute up to 17.5 per cent of her new salary of pounds 19,000. There is a difference however, between what is permissible and what is affordable.

I explained to Rebecca that to provide a level of income in retirement similar to what she would enjoy from the NHS, she would need to consider contributing at a higher level of her salary than the 6 per cent required by the NHS scheme.

To establish how much, I undertook some basic calculations. These can be approximated using basic planning assumptions for future levels of inflation, investment return and Rebecca's earnings growth.

Given the length of time to Rebecca's retirement, even small changes in any one of these factors can have a substantial impact on the eventual results. I calculated that Rebecca would need to contribute in the region of pounds 270 per month into a personal pension, with this level of investment escalating each year by 2.5 per cent. This is just below the maximum percentage of salary she is currently permitted to contribute at her age under Inland Revenue restrictions.

When this level of pension funding was set against her prospective new salary level, we concluded that Rebecca would be in a financially worse position than she enjoyed with her current NHS post.

Rebecca contacted me a few weeks later, and explained that she had decided not to pursue the post at the private nursing home, but had subsequently been offered and accepted a higher paid post at another NHS hospital. This meant that as well as an increase in her salary she was able to continue with her membership of the NHS Superannuation Scheme.

The moral of this tale is that if you are contemplating a change in jobs, make sure you analyse the worth of both your existing benefits package, and that offered by your new employer. To focus exclusively on the different salary levels can sometimes be deceptive.

James Bruce is a senior financial planner at Corporate and Personal Planning, a firm of independent financial advisers(01206 853888)