The risks of sharesave schemes

Sean Jones, Financial Planner

This month 25,000 Asda staff expect to share in a £62m windfall thanks to their participation in the retailer’s sharesave scheme.

Recently released figures from HMRC show that 13,330 companies operated Employee Share Schemes in 2017/18 (up 12% on the previous year). SAYE or “sharesave” is the most popular format in terms of money invested. £1.77bn worth of options were granted last year.

These schemes can be unpredictable but they can be a very tax-efficient way of participating in your employer’s success if its shares rise in value during the course of the scheme. If the company’s shares drop in value then you should get your money back and all you have lost is the interest you might have earned in a cash savings account. Providing your scheme has been set up properly, in the event of your employer going bust, savings in the scheme should be covered by the Financial Services Compensation Scheme (FSCS).

While a sharesave scheme can be a great way to save, we would warn investors about the merits of keeping these shares afterwards. Thousands of employees have suffered huge paper losses after exercising their share options, from Marconi (where everything was lost) through to the Royal Bank of Scotland, where shares fell dramatically and have never really picked up since. If you want to keep the money invested, it is worth considering selling the shares as soon as the scheme matures and reinvesting the proceeds into a diversified fund or portfolio that is suitable for your needs and objectives.

How sharesave schemes work

You save a fixed amount each month into the scheme over a period of three or five years. The money is taken directly from your net wages by your employer, which determines how much you can save – the maximum allowed by HMRC is £500 a month. Once the scheme matures you will be offered the chance to buy shares in the company at the option price, which can be up to 20% below the price those shares were trading at when the scheme began. If the shares have declined in value over the period, you can simply take your cash out.

At present you do not pay Income Tax or National Insurance on the difference between what you pay for the shares and what they are worth, though you might have to pay Capital Gains Tax (CGT) if you sell the shares, they have done particularly well and you have no CGT allowance left.

A key attraction of the SAYE scheme is that it encourages disciplined, regular saving, though if you suddenly find other financial commitments become a distraction you can always withdraw the money you have saved. You can now also take a ‘holiday’ from making contributions of up 12 months before your participation in the scheme lapses. This is a fairly new development – previously you were allowed only a six-month break (unless you were on maternity or paternity leave).

Risks of sharesave schemes

Your monthly savings are ring-fenced within a financial institution – usually a bank – and so would not be affected if the employer went bust.

Check where the money is held and that it is covered by the FSCS. In the event of the bank holding your money going bust, the individual is covered by the FSCS up to £85,000 per person per bank or building society. If you already have savings with the bank holding the SAYE scheme and it folds, you will be limited to £85,000 in total. However, if you save the maximum £500 per month for five years (£30,000) you will be well within the compensation limit, leaving c£55,000 of compensation headroom with that same institution.

Saving into a sharesave scheme will make a lot of sense for many people. Holding on to the shares when the contract matures is another matter. Once you have bought the shares, you lose the FSCS protection you previously had. As we indicated at the outset, your company might continue to prosper and the share price might soar, but you could find yourself holding a large portion of your savings in the same firm that is the source of your employment.

We have seen with Northern Rock and Lehman Brothers that big-name businesses can crash and burn unexpectedly. For staff who lost their jobs in those businesses and saw the value of their shares in the company disappear as well, the pain was two-fold.

Holding these shares in perpetuity after maturity is putting a lot of eggs in one basket.

Capital Gains Tax

As indicated, if you have significant holdings – perhaps from a series of schemes over a long period of time – you may face a CGT bill on disposal (and of course there may be transaction costs). You have a number of options:

First, if you are sitting on a large profit and have unused ISA allowance at the time the scheme matures it is worth thinking about using it, transferring all or a portion of shares into your ISA. If you do this immediately you can shelter them from CGT. You can then dispose of this element without triggering CGT. Even if you plan to keep your new shares, it is worth considering putting them straight into an ISA wrapper on maturity of the scheme. You may be able to transfer the shares into your pension too and enjoy similar benefits.

You can also give shares to your spouse or civil partner without it being considered a disposal by HMRC. We each have a CGT allowance – technically it is known as the Annual Exempt Amount. In this tax year (2019/20) it stands at £12,000. That is the amount of profit you can make on a disposal before you have to pay CGT. It means a couple can enjoy gains of £24,000 between them.

You may also consider that the benefits of not paying CGT outweigh the risk of your company folding and so stagger the disposal of your shares over two or three tax years to avoid paying the tax. Of course, tax rules are always changing so before you do anything check the latest position to ensure you are not going to be landed with a nasty surprise bill.

Posted on the 26th July 2019 and updating a previous article

Opinions and views expressed are personal and subject to change. No representation or warranty, express or implied, is made of given by or on behalf of the Firm or its partners or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions.

The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. Fluctuations in interest rates may affect the value of your investment. The levels of taxations and tax reliefs depend on individual circumstances and may change. You should be aware that past performance is no guarantee of future performance.