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How much are you really worth?

Employee benefits are often thought of as just a secondary consideration to one's basic salary. However, Debbie Harrison explains why you should think of these benefits as financial products in their own right

In the context of modern financial planning it is helpful to think of employee benefits – for example, pensions, disability insurance and life assurance – as financial products paid for by employers in addition to salary. If you are thinking of changing jobs or becoming self-employed therefore, you need to consider very carefully the total investment and protection package you require from your new company or from your freelance consultancy work. For senior executives, employee benefits can be worth 30% or 40% of basic earnings and the cost of replacing these items privately would run into thousands of pounds.

Are benefits really that valuable?

Yes, but their value will depend on your seniority and on the generosity of your employer. Obviously salary – more specifically, cash earnings – is important but, if you focus solely on the pay cheque when you look for jobs, you are likely to underestimate by a wide margin the cash value of other benefits. Armed with the full details, you may find the high prospective salary or freelance earnings mask an overall reduction in the cash value of the total package.

Which is the most expensive benefit

to replace?

Without doubt the big-ticket item these days is pensions. We are living longer and therefore the funding of an income in retirement costs much more than it did for our parents and grandparents. If you leave a salary-linked (defined benefit) scheme, it could cost you 20% of your earnings to replace it with a broadly equivalent money purchase (defined contribution) plan. So, let's assume you reckon you'll earn £70,000 from freelance and consultancy sources. In this case – and assuming you are in your 40s or older – you probably need to pay £14,000 or more a year into a personal pension plan just to keep your retirement planning on target. A good financial planner would provide you with an accurate replacement contribution rate.

What else do I need to consider?

Replacing the company car may set you back £10,000 or more if you become self-employed. But while you could make do with a cheaper model, you can't afford to stint on family protection benefits such as life assurance and income protection insurance (which provides a replacement income if you are too ill to work). The price you pay for these privately will depend on your age, your state of health and your occupation. Women tend to live about five years longer than men and therefore tend to pay less for life assurance. However, due to the high incidence of health-related claims in their 40s and 50s, women can expect to pay more for income protection insurance.

So how much do income protection

and life assurance cost?

Let's say you are a man turning 50 next birthday and you want to insure an income of £500 a week (£26,000 a year) to cover the essential items if you are too ill to work. This is likely to cost about £2,500 a year for a non-smoker where the "deferment" period – that is, the period between stopping work and drawing a benefit – is 13 weeks. Smokers can expect to pay more than double this amount.

The maximum life assurance employers provide is four times annual salary, although most pay for two or three times salary. Life assurance as an employee benefit should be paid under a discretionary trust, so it will be tax-free for your beneficiaries. Rates vary considerably but a man aged 50 and in good health will pay £30 to £50 a month for £100,000 of cover for 15 years (double for smokers). This would be a small amount of cover for someone earning, say £50,000 to £70,000 as, depending on your outstanding debts, you need about 10 times annual salary in total. This is a rough estimate – a good planner will give you a more precise figure.

If you're used to company-paid private medical insurance or "PMI" for you and the family, this is likely to cost another £3,000, although the precise amount will depend on the number of people covered, their age and state of health. As you get older, rates for PMI get much more expensive.

Do note that all these figures are the most competitive rates quoted in the financial adviser publication Moneyfacts. If you don't shop around or go through an adviser, you will end up paying more.

Do "golden handcuffs" reduce or

increase benefits?

This is an important point, as your employment contract will dictate how much you receive from your employer and any conditions attached to the deal. Annual bonuses are straightforward because they are paid with reference to the past year. Obviously much depends on the nature of your job but senior employees typically receive 15% or 20% annual bonuses if their performance and/or the company's performance have hit the necessary targets.

The remuneration arrangements to examine very carefully are those where the payment in cash or shares, for example, is staggered over a period of years. If you leave, you stand to lose the deferred remuneration that has not yet been paid. Share options often fall into this category.

Watch out for other clauses that have nothing to do with gold and everything to do with handcuffs. A very senior employee might be bound by a "lock-in" clause that insists on a long period of notice – for example, six or even 12 months. There may also be a "non-compete" clause, which specifies a period of time during which you cannot work in a similar position for a competing company or set up your own company in direct competition to your existing employer. If you have a complex contract and are considering moving on, you might need an employment lawyer to help sort out your severance pay and terms.

My new employer offers a "flex"

scheme. What is this?

"Flex" is a modern benefits strategy and is used by employers who are keen to limit their spending on benefits but also to ensure that employees really value the package they receive. Companies that offer a flexible "menu" of benefits allocate employees an annual budget or a number of points with which they make their "purchases". Typical options include extra holiday, life assurance, private medical insurance and childcare vouchers. In some cases, extra pension is also on the list. Once made, the selection generally becomes part of your contractual agreement with your employer until the next review.

how do i get best value from flex?

Again you need to know the cost of replacing the items privately. You should also consider availability and usefulness. For example, if extra holidays are only available from the employer, this will be a "sole source" item. Most flex items can be purchased elsewhere if necessary, so your choice will be driven by preference as well as cost.

In practice, there is often no real cost saving if you take extra days' holiday through the flexible benefit plan rather than asking for unpaid leave but there are two important benefits. First, it spreads the cost over a whole year, rather than leaving a big dent in one month's pay. Second, the days are guaranteed because they will form part of the contractual entitlement, whereas an employer is not obliged to grant unpaid leave.

Any catches?

With the exception of life assurance, you will probably be taxed on most items because they are classed as a benefit in kind. The amount of tax you pay will be based on the cost to the employer of providing the benefits. Ask for details on this point before finalising your selection.