Episode 360 - On this week's podcast I discuss sharesave schemes explaining what they are and who should consider them. I also explain how the Money to the Masses campaign 'Grow it' can help you to understand more about investing and building wealth. Finally, we talk about the latest state of play in the mortgage market.
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Abridged transcript - Episode 360
Damien Fahy 5:17
On this week's show, we’re going to be talking about share save schemes, our ‘Grow It’ campaign on Instagram, as well as the state of the mortgage market. We're also going to do a piece about accountability as it was International Women's Day this week.
Share Save Schemes
Save As You Earn (SAYE) scheme
Damien Fahy 6:22
Save As You Earn schemes (SAYE), also known as Share Ownership schemes, or Share Save schemes, came about in the 1980’s and they allow people to regularly save via their payroll at work over a three to five year period.
You put money aside each month for a three to five year term, depending on the scheme, and then at the end of that period you have a choice of simply getting that money back with, theoretically at least, an interest payment or buying shares in your employer at a discounted rate.
The idea is that you can share in your employer's success, because you effectively invest in the shares of the company you work for, but you get them at a discounted rate.
In order for a company to run a Save As You Earn scheme, they need to be a public company listed on the stock exchange, e.g. the FTSE 100, or owned by a public company that is listed.
There are 14,000 companies in the UK that operate these schemes and if you take part, you can usually save between £5 and £500 a month from your net pay into these schemes. Usually, each year you are invited as an employee to take part in the scheme. If you want to save £50 a month into the scheme then every month from that point thereafter, for the term of this scheme, which is usually three or five years, then you will save £50 a month. That money usually goes off to be held at a bank, for example, as part of the scheme. Then, at the end of the period, you have a number of choices.
The key thing is the maximum of £500 a month goes across all of the schemes that you will be eligible to take part in. Each year you may be invited to take part in a scheme so you need to bear in mind that the total you put into all schemes running concurrently mustn’t exceed £500. If the cumulative total you're putting in a month is £500, you can't join a new scheme until you're paying less than £500 a month. So that means that if you get invited to join the scheme and you decide to put in £500 pound a month, then the following year you couldn't join the next share save scheme.
At the end of the term, the scheme effectively matures, and that's where you have the options of what you want to do with the money. So, if you keep joining these schemes over a period of time, then every three to five years, depending on the term of the scheme, you would effectively get a potential windfall. That is why they can be very good ways to save and because you get a discount on the shares in your employer. The share price is set at the start and there is a maximum discount of 20% off the market price on a set day before the scheme starts. So when you get to the end of the scheme, the price which you then can purchase the shares is already set in stone. And so you now know what the market rate for those shares are in the general marketplace, where you can see the price that you can buy them at with the money you've accumulated over the three or five year period. Of course, that price was discounted anyway.
Every year there will be a deadline for these schemes, so they will invite you to join and you have to get your application in quickly. If it becomes oversubscribed, as there will be a certain limit that the employer will want to offer in terms of discounted shares, they may do something called ‘scaling down’, where they effectively knock down the amount that you are able to save into the scheme by the same proportion for everybody that’s applied to be in the scheme, just to make it fair.
When you apply, the amount you contribute is set in stone. So, if you decided to put in £50 a month, that will be set until the end of the scheme. You can't make ad hoc payments, so if you wanted to put in more, then you need to wait for next year’s scheme and you can join that one.
Typically, you may get a bonus at the end on top of the amount of money you've saved, but that amount is dictated by HMRC and at the moment it’s nothing. At the end of the scheme, you have a number of choices as listed below:
- You can take your cash back, e.g. if you work for an employer and the share price has tumbled, so it is even lower now than the discounted price that you could purchase shares at, as agreed at outset under the rules of the share save scheme, then you wouldn't want to buy the shares because they would immediately be worth less in today's market. So you might decide to just take the money back. That is why share safe schemes are seen as a very safe way of saving, because effectively you're just putting money aside. You won't get a decent interest rate, unfortunately, you would get more if you put it into a savings account, but you have the option, but not the obligation, of being able to buy shares.
- The second option is to buy the shares in your company at the agreed discounted price and immediately sell them in that same transaction. You then effectively get a windfall. This will work if your company's share price has risen over time. There is obviously a CGT liability, but that's if you are making more than your capital gains tax allowance on your share save scheme, which isn’t likely for most people.
- The other alternative is to buy the shares and just keep them. That can become risky over time, because if you work for an employer, and after every three to five year period, you start getting more and more shares in the company you work for, then your wealth will become more and more concentrated in a single company’s shares which is a very risky thing to do. The best thing is to diversify your investments.
- You could alternatively buy some shares with the money at the end of the term of the Save As You Earn (SAYE) scheme and then sell some of those as well.
- Or you could buy some shares and leave some as cash in the scheme for the time being, but you have a six month period in which to decide what to do with the cash that's in the scheme. So you can't just sit there forever not making a decision.
- Or finally, you could obviously do nothing at the scheme’s maturity date, not make a decision, but, like I say, in six months time you've got to do something, whether you get the money back or you decide to buy shares.
The reason these schemes are very interesting is that they are effectively a risk-free way of saving, because the money is held at a bank and you are covered by the Financial Services Compensation Scheme (FSCS), up to a £85,000 limit. There is therefore the potential to just get your money back, or you could make a sizable profit if your shares in your company go up during that period of time.
There are people for whom SAYE isn't a great idea, e.g. if you've got lots of expensive debts (you should be paying down those first) or if you have no spare income or you have no emergency fund.
Save As You Earn Schemes are a really good way of dipping your toe into investing.
What happens during the three or five year period if you decide that you want to get out or you leave the employer?
The good news is that you get your money back. Technically you get your money back with an interest payment, however, that interest rate is set by HMRC and it's currently zero.
There are some nuances of the scheme around what happens if you go on a sabbatical or you have extended paternity leave. If you go on a sabbatical, you might not be being paid, but you can agree to pay standing orders to cover the monthly amounts that go into the scheme rather than coming from pay, because you're not getting paid, but you're still employed by that employer.
Share Incentive Plans
There are other schemes that employers run that offer the ability to buy shares in your employer:
A share incentive plan (SIP) allows employees to own shares in their company and there are four different ways in which it's enacted.
- Free shares - your employer can award you up to £3,600 worth of free shares in any tax year and it can be tied to individual or team performances.
- Partnership shares - are another option under a SIP, which you can buy using gross pay, so it's different to the share save schemes mentioned. However, there are limits on those which are £1,800 a year, or 10% of your total salary.
- Matching shares - where if you buy partnership shares, your employer can match them by giving you up to two free shares for every one that you buy.
- Dividend shares - where you can buy more shares in your employer using the dividends from free, partnership or matching shares.
If you keep the share incentive plans for five years, you won't pay income tax or national insurance on their value, and you won't have to pay capital gains tax on the shares you sell if you keep them in the plan until the point of selling.
You can find out more through the official government site links at the foot of this page.
Restricted stock units
There are also restricted stock units (RSUs), which are quite popular with technology companies, particularly in the US. With those, you are given a number of restricted stock units and then over a period of around four years they vest, so you'll be able to get access to those shares. And every year thereafter, you might get another amount of shares, and they vest. It’s a way of getting shares in the company, which are then vested over periods of time while you work there. It means that you can get a windfall every year while you work for a company. You have to pay National Insurance and income tax when they vest but it's quite complex and they’re taxed completely differently than SAYE schemes or SIPs
Accountability
Harvey Kambo 26:09
Last year when International Women's Day came around we conducted a survey to find out more about our female audience. There were some interesting findings that we wanted to share with you, and also reflect on where we are at Money to the Masses, what we're doing, what we would like to continue to do and what's coming up for our female audience as well.
The survey told us that 60% of women agreed that personal finance was a bit too male-dominated, 63% of the woman felt there was too much jargon in personal finance, and over 80% of women showed a keen interest in online learning to improve their financial knowledge. A lot of this was underpinned by a desire from our female audience to build resilience and independence in their financial lives.
We're trying to stamp out all kinds of elitism, not just the gender-based elitism that we face in personal finance.
One of the things that we continue to do is to fight a lot of jargon. We speak in plain language wherever possible, explaining some of the technical terminology that you might come across in personal finance as we go. We've recently put together an investing jargon buster which should give you even more tools to help you with understanding some of the jargon in that space.
Keeping our language gender-neutral is really important to us. We're not assuming that males or females in households are leading or making decisions or are earning more. We've been looking at ways in which we can address caregivers and homemakers, as well as the breadwinners inside homes. We know that in order for homes to work and be financially resilient that not only do we have to think about the breadwinners that are bringing in money, but also the caregivers and the homemakers that help those structures work and keep those breadwinners doing what they're doing. More often than not, we are finding that women are the breadwinners, which challenges the old notions that we were looking to talk to men when it came to incomes.
Andy Leeks 29:11
The women outnumber the men on the Money to the Masses editorial teams so it’s been great to have these conversations in the office. It’s great for the podcast because when we started eight years ago, all the topics were being researched by just Damien and me and there was very little female influence. So, it's great to now have that female perspective on the podcast.
Harvey Kambo 30:01
Hearing what each of us has to say about our particular spaces within personal finance has enriched the conversation even further. We keep it to the same accessible conversation that everyone can understand and take something away from, which ultimately, is our goal at Money to the Masses. We were already inclusive, because we were battering down the door of elitism and bringing this to people across the spectrum, regardless of what they earned but that's expanded now. We have another group of people and their voices are coming through. That means we're being more inclusive, and hopefully, our audience is widening and we're appealing to an even larger group of people.
Mortgage deals disappear
This section of the podcast covers our article "Mortgage deals pulled and 2 year fixed deals at 6 year high" which you can read in full via the link below.
