55,000 Tesco workers have doubled their money thanks to Sharesave.
Around 55,000 Tesco (LSE: TSCO) employees have pocketed a £144 million windfall from buying shares in their employer. On average, this payout comes to £2,618 per person, which is a nice little bonus.
This payout came from an employee share-ownership plan known as Sharesave, also called Save As You Earn (SAYE) or Savings-Related Share Option Scheme. Tesco's SAYE scheme has been operating since 1981 and has over 82,000 employees participating in at least one scheme. This makes it one of the UK's very largest Sharesave plans.
SAYE, this looks great
SAYE was launched in 1980 in order to encourage greater employee share ownership. Companies offer Sharesave and other share-incentive plans in order to boost productivity, foster better employer/employee relations, and improve staff-retention rates. SAYE has been a great success, as there were 830 approved Sharesave schemes in operation in July 2009.
Here's how SAYE works:
- In effect, Sharesave is a monthly savings plan with share options attached. Each share option gives you a right to buy one share at a future date at a fixed price. This price may be the market price of the share at the date the option is granted, but a discount of a fifth (20%) off the market price is quite common.
- Your savings contract is set up with a bank or building society and can last for three, five or seven years. With a seven-year contract, you save for five years and then your savings rest in the account for another two years.
- You can save between £5 and £250 a month across all SAYE plans, with this sum being automatically deducted from your salary via payroll. All employees can subscribe to SAYE, but there may be a qualifying period of employment (say, one year) before you can join in.
- On maturity after three, five or seven years, a fixed, tax-free bonus is added to your accrued savings, as follows:
|Contract length||No. of payments||Bonus||Interest equivalent|
|3 years||36||0.6 contributions||0.54%|
|5 years||60||2.6 contributions||1.42%|
|7 years||60||5.6 contributions||1.84%|
As you can see, these bonuses are quite small: just £150 for 36 months of saving £250 a month, equivalent to a yearly interest rate 0.54%. This reflects the ultra-low base rate and low interest rates in general. When market rates start to rise again, the bonus paid by future SAYE plans should go up, too.
- If you pull out your money before your contract has matured, then you lose your options and receive no interest during the first year. Twelve or more contributions attract an early-leaver rate of just 0.36% a year.
- When your contract matures, you then have an option (but not an obligation) to buy shares, possibly at a significant discount to the market price. This option lasts six months before expiring, which gives you plenty of time to make up your mind.
- Of course, if the 'strike price' of your options is above the market price of the shares, then it makes no sense to exercise your option. Instead, you could take your cash and, should you wish, buy shares at the (lower) market price.
- The great thing about Sharesave is that it is very low risk. If your company's share price plunges, then you simply take your cash and allow your share options to lapse.
- In addition, being granted options at a discount of up to 20% below the market price allows you to make a profit unless the share price falls by a quarter (25%) or more during the life of your contract.
- As SAYE involves share options and not shares, you do not qualify for any dividends paid by your employee to its owners. However, you do become entitled to dividends after exercising your option and taking delivery of your shares.
- Lastly, SAYE contracts are not liable to income tax, unless your options are exercised early (for example, if a company is taken over). However, you may be liable to Capital Gains Tax (CGT) at the current rate of 18% on your profits. Then again, each adult has a tax-free CGT allowance (£10,100 in the 2009/10 tax year), and few people make gains in excess of this limit. One tip to avoid CGT is to transfer SAYE shares into an ISA after exercising your option.
Now for the exciting part!
The best way to demonstrate the powerful appeal of Sharesave is with a worked example. Here's one loosely based on a Sharesave scheme to which my wife subscribed in the boom years of the Nineties:
|Contract length||Five years|
|No. of options granted||3,268|
|Market price on maturity||£15|
|Value of share options||£49,020|
As you can see, £250 a month for five years grew to be worth over £49,000. Thanks to the discounted options, the original £15,000 saved more than tripled in value, even though the share price rose by only 150%. That's the power of Sharesave!
In summary, if you're after a simple, low-risk, tax-efficient way of saving which can provide bumper returns plus a no-lose guarantee, then Sharesave should be your number-one choice -- particularly during this weak economy.
You can learn more about Sharesave and other employee share plans at ifs ProShare.
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