Is that new job really worth it?
June 18th, 2012
Whilst most of us weigh up the cost of the key financial decisions we take throughout our life (such as the cost of a mortgage and the price of a new car) perhaps the one we do not often scrutinise in as much depth is as we should is a change of employment. Whilst it is straightforward to work out what a pay rise means in term of take home pay, it is also important to quantify the value of any other benefits you may be giving up.
To illustrate the potential impact let’s consider the following scenario:-
David, 35, is married with 2 children. David works as a Payroll Manager for £28,000 p.a. but has recently applied for and been offered another job with a salary of £36,000.
One thing that David is aware of is that he will lose Private Medical Insurance and, whilst he is a member of his current employer’s 1/60ths final salary pension scheme, his new employer operates a Money Purchase scheme. He currently has to contribute 6% of his salary to the final salary pension scheme, although in respect of the new scheme his minimum contribution is 3% (matched with an equivalent contribution from the employer).
David also currently has death-in-service benefits of 4 x salary. His new employer does not offer this benefit.
David has sought advice primarily on arranging some Private Medical Insurance and Life Assurance for himself & family to replace the cover he will lose with his employer.
It is worth at this point considering the benefits that David will lose by changing employment:-
David currently contributes £1,680 (gross) p.a. to his employer’s pension scheme. For this David accrues 1/60th final salary for each years service – Currently, therefore, this equates to around £466.66 p.a. for each years service.
Assuming David’s salary increases only in line with inflation (which we will assume to be 3.5% a year)and that David has the potential for 25 years further accrual in the final salary scheme this equates to an additional potential annual pension of £27,570 (or £11,666 in today’s equivalent terms).
But what fund would David need to accrue in his new pension scheme to provide these benefits? Assuming an annuity which builds in a 50% spouse’s pension and RPI escalation (using an approximate annuity rate of 2.62%) he would need an approximate fund of £1,052,290
To achieve this figure this would require annual contributions of around £18,094 p.a. assuming investment growth of 6% p.a. (after charges). Given his combined individual & employer contributions will total £2,160 (gross) he might need to save an additional £15,934 (gross) p.a. (or £12,747 net of tax relief) to match the benefits he could have received from his old scheme. Accounting for National Insurance, David would need to earn £18,745 to cover the net contribution
This is a whopping £398,350 of additional contributions (gross) over the next 25 years.
<strong>Death in Service</strong>
To replace the death-in-service cover David will lose, based on current rates, would cost around £120 p.a. for a 25 year policy with a sum assured of £112,000 (with the benefit increasing in line with inflation). Of course premiums will vary between insurance companies and this assumes David is in good health and can obtain cover on normal terms. Accounting for tax and NI David would need to earn around £175 to cover this additional cost.
<strong>Private Medical Insurance</strong>
Again, whilst the actual cost of a policy will depend on the insurance company selected, the level of cover required, and the exact type of policy a typical premium might be around £25 per month (£300 p.a. – or £440 accounting for tax and NI)
So David will actually need to earn the following amounts in order to replace the benefits he will lose:-
• Additional Pension contributions £18,745 (assuming 6% growth p.a. after charges)
• Life cover £ 175
• PMI <span style=”text-decoration: underline;”>£ 440</span>
£19,360 (against a salary rise of £8,000)
Clearly the above comparisons are largely academic as David is unlikely to stay in the same role until retirement – particularly if he had no prospect of significant salary increases! Of course other factors will also be just as (if not more) important such as future job security, career prospects, travel costs, and other possible benefits on offer (e.g. a company car)
What this article hopefully indicates, however, is the value in considering the costs (as well as the benefits) of any potential new employment when making a decision – At the very least being better informed puts you in a stronger position to negotiate with the prospective employer as you will have a better idea of the worth of your current salary & benefits package.
<em>Of course every situation will be different so should you require advice please do not hesitate to contact us and we will be happy to assist</em>
<em>Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor</em>
<em>The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.</em>