MONEY COMMENT
Grab A Windfall From Work

By Cliff D'Arcy
February 3, 2004

Which would you rather do: buy shares at their full market price, or have the option to buy them at a discount - with a cast-iron guarantee that you don't have to buy them if they fall below a pre-set price? The second option sounds like the smart thing to do, doesn't it?

The more generous UK plcs allow their staff to do just this through Save As You Earn schemes, often known as SAYE, Sharesave or Savings-Related Share Option plans. These schemes have made a lot of money for millions of employees since they were introduced in the early Eighties. Currently, there are over 1,200 approved Sharesave plans, with around 1.75 million savers.

Here's how they work (this is just one example; three- and seven-year plans also exist):

Simon, who works for Tesco (LSE: TSCO), was invited to join the company SAYE scheme five years ago. Being a sensible bloke, he decided to save £250 a month - the maximum contribution allowable. Simon liked the idea of buying shares in five years' time at only 80% of today's price (20% off).

The last five years have flown by, and Simon has been checking the share price every now and then. It's been comfortably above his 136p right-to-buy price - but he's not worried. He knows that if the price collapsed, he could take out his savings (and his tax-free bonus) in cash when his SAYE plan matures.

As it happens, Simon's done very nicely indeed, thank you very much! Here's how much he's made:

Savings: 60 x £250 = £15,000
Tax-free cash bonus of 7½ monthly payments = £1,875
Total savings: £16,875
Discounted share price: £1.36
Number of cheap shares that Simon can buy: 16,875/1.36 = 12,408
Current share price: £2.41½
Currently, Simon's shares are worth: 12,408 x 2.415 = £29,965

So, Simon has just about doubled his money over the last five years, despite the fact that Tesco's share price has only gone up from £1.70 to £2.41½, an increase of 42%. Simon's return was boosted by his initial 20% discount (he buys at 138p, remember) and his tax-free bonus.

Being a Foolish kind of guy, Simon knows that he can avoid paying capital gains tax by putting some SAYE shares into an ISA within ninety days of acquiring them. Also, he plans to gift some of his shares to Mrs Simon. They will then both sell some shares, using two annual tax allowances of £7,900 (for the 2003/04 tax year).

There should be a few smiling faces in Tesco's stores today, because 45,000 of its staff are sharing SAYE payouts totalling £110 million. The average payout is £2,444, so Simon is one of the biggest winners. Even those who saved a mere £5 a month will be in line for a £591 windfall (a fiftieth of Simon's payout), which is a nice little earner for those on low wages!

As it happens, two-thirds of Tesco SAYE investors (67%) hang on to their shares, which is a great vote of confidence in the company by its workforce.

There's more about SAYE schemes in Shares With A No-Lose Guarantee and Free Money From Your Employer.

More: ISA Centre | Learn to Invest | ProShare UK (promotes employee share ownership).