Nought to a fortune in three years flat
(The Mail on Sunday Via Thomson Dialog NewsEdge) Life has never been better for Paul Doughty.
The 30-year-old bachelor drives a Nissan 350z sports car and is looking forward to a Mediterranean cruise this summer. And it is all because he was shrewd enough to spot a golden investment opportunity that doubled his money.
So what was this complicated piece of financial wizardry? There wasn't any.
It was simply buying shares in the company for which he works.
Paul saved GBP125 a month over three years to put away a total of GBP4,500. This allowed him to buy discounted shares last month with a market value of GBP10,650, which he sold for an instant GBP6,150 profit.
He is one of more than two million employees who are members of company share saving plans.
Many are now enjoying the fruits of three years of largely good stock market growth.
Paul is a sales team leader at the PC World chain of computer shops.
This is part of DSG International, formerly Dixons, which also owns Currys and The Link. More than 3,000 DSG employees shared GBP20 million last month when its latest share savings scheme matured.
And DSG staff are not alone in enjoying the rewards from such savings s c h e m e s .
About 19,000 Lloyds TSB staff enjoyed a GBP69 million payout from their share savings plan a fortnight ago while employees at both Tesco and Marks & Spencer have together received more than GBP150 million this year.
Sharesave (or Save As You Earn) PAUL, from Castle Bromwich, West Midlands, participated in the most popular type of employee share plan, the Sharesave scheme, also known as Save As You Earn.
Staff are invited to sign up for three or five years and save monthly into a special account. The money is deducted from taxed pay and transferred direct by the employer into the account.
Employees are granted an option to buy shares at a set price when the plan matures. The option price is decided by the employer and can be at a discount of up to 20 per cent compared with the cost of shares when the plan started.
On maturity, the savings account pays a modest tax-free bonus. On a new three-year plan, for example, the bonus is equivalent to 2.49 per cent a year. Then the whole sum can be used to buy shares at the option price. If the shares are trading at less than this, the employee can simply take the cash. But if the shares have done well, staff buy at a big discount to market value. Jill Evans, who is in charge of Sharesave at Yorkshire Building Society, one of the biggest administrators of the plans, says: 'We explain the option to employees as like betting on a horse race when you know the winner. You only use it when you are sure to profit.' In Paul's case, the option price was 84p, but DSG shares have been trading at between 185p and 200p.
He says: 'Three years ago, the stock market was depressed and it was clear that the share price for the firm was artificially low. I looked at the option price we were given and thought I would be stupid not to sign up to the scheme.' Paul says that he and his colleagues spent the final six months of the plan's life constantly monitoring the DSG share price. 'The smiles from staff in the stores were growing bigger and bigger as the share price kept rising,' he says.
Though the money paid into a Sharesave plan comes from taxed income, no tax is levied on the valuable option itself or on the interest the monthly savings earn.
Profits made on selling the shares may be liable for capital gains tax, but each person can make annual profits of GBP8,800 from shares before tax is due.
Jane Tuckwell, from ifsProShare, which promotes employee share plans, says: 'Those who are lucky enough to have enjoyed huge gains can spread the sale of shares between different tax years, or they may be able to transfer shares to a spouse so that they can maximise their CGT allowances.'
A word of warning SHARESAVING does not mean guaranteed profits. Recent analysis of such schemes, conducted by ifsProShare, found that roughly one in seven plans were ' underwater', which means that the option price at which employees were entitled to buy shares was higher than the market price. While they will get back the cash saved, employees in this position will not enjoy a bumper return.
Richard Hunter of stockbroker Hargreaves Lansdown is a fan of share plans, but warns against keeping shares in one company for too long. 'Employees can end up building up quite big holdings if they hang on to shares as plans mature,' he says. 'This can leave you exposed if that company's shares hit trouble.' For example, many Marconi employees saw their share savings wiped out when the company collapsed in 2003.
Loyalty WHY do companies bother with the trouble and expense of running share plans? Louise Bentham, director of employee reward at DSG International, says: 'We like to see staff sharing in the success of the company. A big windfall creates a buzz and the share schemes help act as a corporate glue to join together our different brands.' Share plans also help companies to keep their staff. Gary Thompson, a forklift operator with Bellway Homes, has worked for the housebuilder for 18 years and has been paying into a series of SAYE plans for about 15 years.
Gary, 44, from Chester-le-Street, County Durham, says: 'These savings plans are better than putting money in the bank. It makes you think twice before looking for work anywhere else.' He pays GBP160 a month into four different plans with Bellway. The last plan to mature gave him a 240 per cent profit on the money he had saved. 'I don't think some of the people here realise just what a good deal this is,' says Gary.
When employees quit to go to another job, they usually lose any options granted under a Sharesave plan, though the cash they have saved is refunded.
However, most schemes allow for a change in circumstances beyond your control, for example redundancy, ill health or a corporate takeover. In these cases, those who leave employment before their plan matures can exercise their options early.
Bosses chip in to help Anne grow Share Incentive Plans WHILE SAYE has been around for 25 years, Share Incentive Plans began only in 2001. They have more generous tax concessions, but require employees to take a genuine gamble with their money.
Employees pay in monthly but buy shares in their employer as they go along.
The money used to buy the shares comes from pre-tax salary.
Provided staff hang on to their shares for five years, there is no income tax to pay on them or on the dividends, and no capital gains tax on any sale proceeds.
On top of this, generous employers are allowed to match the savings their staff make. In total, shares worth up to GBP9,000 a year can be accumulated in these plans, all potentially free from tax.
Anne Buchan has had a helping hand from her employer, Lloyds TSB, to build her share investment plan. She pays GBP30 a month, which is matched by a further GBP30 from the bank. The total of GBP60 is then used to buy Lloyds TSB shares each month. Anne, 43, a marketing manager, lives in Penicuik, Midlothian, with her husband Graeme, 46, and their children, Hannah, 16, and 14-year-old Ross.
She says: 'The money is taken direct from salary so you don't really miss it.' The bank also gives free shares each year to those who save into the plan. This bonus, linked to company performance, was worth three per cent of salary last year.
Anne has also been saving in Sharesave plans since 1996. She has committed money to a series of plans with different maturity dates and is currently saving GBP250 a month.
Her latest plan matured at the start of the month, turning her savings of GBP50 a month over three years into a nest egg worth GBP3,425 on the day the scheme matured. The share option price was 284p against a market value of 515p.
Cash in on a revolution and let the taxman multiply your pension A REVAMP in pension rules this year has given employee shareholders new ways to profit.
Restrictions on employees belonging to a company pension and to a personal pension at the same time were relaxed in April's A-Day shake-up.
It is now easier for staff to switch some or all of the profits of a share scheme into a pension and to double up on tax relief.
Jonathan Watts-Lay of pension consultant JPMorgan Invest says: 'Harnessing the incentives from both share plans and pensions can dramatically multiply the value of money you pay in. We're talking to a number of companies about setting up a Self-Invested Personal Pension to run alongside their share schemes and give staff another option.' The biggest gains come for staff who choose to pay money from a maturing Share Incentive Plan into a pension.
Take the example of a scheme where an employer matches an employee's share saving of GBP50 a month.
For each GBP50 saved, the employee gets GBP100 of shares. The savings come out of gross pay, meaning that a worker on a salary of GBP30,000 can get shares worth GBP100 by sacrificing just GBP33.50 of takehome pay If the share price does not change during the five years a worker is locked into the share plan, at maturity the employee can either transfer the shares direct into a pension or sell them and pay in the proceeds.
Each GBP100 paid into a pension attracts tax relief, boosting the value to GBP128. But if those shares rises by 50 per cent over the five years, they are worth GBP150. This means the pension contribution is worth GBP192 with basic-rate tax relief - still at a cost of only GBP33.50. The potential gains are higher still for a 40 per cent taxpayer.