“Workers are rushing to take up benefits such as company share plans,” says Ali Hussain in The Sunday Times. The amount invested in save-as-you-earn (SAYE) schemes has jumped by 27% over the past year, according to Equiniti, which runs plans for around 130 firms. In total, five million UK workers are now estimated to be members of these schemes. But should you join the rush?
SAYE schemes allow staff to pay from £50 to £250 a month into their firm’s savings plan over a period of three, five or seven years. The money earns no interest but qualifies for a tax-free bonus at a fixed rate set by the government when the plan matures. On maturity, the employee has the right to buy shares in their employer at a discount of up to 20% of the share price when they first entered the scheme. For Tesco staff, who have saved £50 a month over the past five years, the result will be a windfall of around £5,600 (based on the amount invested, multiplied by the gap between the 2003 option price of 195p and the Tesco share price on maturity). That’s an 88% return over a period when the FTSE 100 has dropped 5%.
So is SAYE a no-brainer? Well, no. There are a few risks attached – that’s why the government offers a tax break. First, while saving in Tesco shares has turned out to be a good bet, times have changed. Tesco is unlikely to go bust, but the recession will claim many other victims – if your employer is one, your SAYE money could vanish, leaving you both unemployed and with a big hole in your savings.
Next, the bonus rates are being cut. The annual rate on three-year schemes is falling to the equivalent of 1.08%, from 2.67%, while for the five-year plans it will be 1.67% rather than 3.04%. That’s 2.78% pre-tax for a higher-rate taxpayer, below the rate you could earn on the best cash individual savings accounts (Isas). And SAYE schemes tie up your cash – if you leave early, the options disappear and the bonus rates shrink – to zero should you withdraw within the first 12 months.
But what about those options? They can be great if your company does well, but are worthless if the share price on maturity is below the option price at which you entered the scheme. That’s a problem for staff in schemes run by banks such as RBS. Bank staff also need to be aware that money in SAYE schemes counts towards the £50,000 Financial Services Compensation Scheme limit should the bank fail. This isn’t to say that you should avoid joining any SAYE scheme. But make sure you have a savings fund (of at least three months’ salary) saved up first – then think about how confident you are that your firm will be around in five years’ time.