The unexpected plunge in the value of BT shares last week – it lost 20.8% in a day on Tuesday following the news of its accountancy problems in Italy – is a reminder not to have too many investment eggs in one basket. Or too much of your money invested in one single company, in other words.
Many of those BT shareholders will be employees of the company who bought their shares using company sharesave schemes. More than 1,000 companies offer a Save As You Earn (SAYE) sharesave-type scheme.
They’re a very tax-efficient way to save. Most recent HMRC figures published in 2014 estimated they’d saved investors in 2012/13 £240m in income tax and around £190m in national insurance contributions.
You can save up to £500 a month into a SAYE scheme (if your company has one and allows it – many have a lower limit). Savings are made by payroll deduction from net salary. The schemes last for three or five years. The company set the price of the share at the point at which the scheme is introduced – it can discount the market value of the shares by up to 20%. At the end of three or five years you can decide whether to go through with the purchase or whether to take the cash instead – plus a reasonable tax-free bonus.
So staff at BT on the five-year scheme introduced at the beginning of August 2011 paid £1.56 an option. At maturity five years later (1/8/16) those shares were worth over £4. Effectively, the shares were worth more than twice what they had to pay for them. Today they’re worth around £3 following this week’s tumble. The price being offered to those on the BT three-year sharesave scheme which began in August last year is £3.97.
Let them go
The challenge lies in what to do with shares bought through these schemes after you have paid for them. Many people sell them and use the proceeds to pay for holidays or to reduce the mortgage. But many will hold on to them, which is not always wise.
Charles Calkin, a financial planner at James Hambro & Co. says: “Saving into a sharesave scheme will make a lot of sense for some people but holding on to the shares when the contract matures is another matter. Yes, your company might grow and the share price might soar, but you could find yourself holding a large chunk of your savings in the same firm that is the source of your employment.
“No-one is saying that BT is about to implode, but we have seen with Northern Rock and Lehmans Brothers that big name businesses do tumble and for staff who lost their jobs in those businesses and saw the value of their shares in the company disappear too the pain was two-fold.
“Saving in a share scheme can be a good idea, but holding the shares in perpetuity after maturity represents a concentration risk. It’s worth considering selling the shares afterwards and moving your assets into a diversified fund or portfolio that is in line with your attitude to risk.”
He says now is a particularly good time to review old shareholdings. “If you sell you may be crystallising a gain and liable for capital gains tax. You have an £11,100 capital gains allowance up to 5th April. We are waiting for the Budget to find out what next year’s allowance is, but if you have a particularly large holding you may want to sell in tranches either side of the tax year end.
“It’s worth taking advice before you do anything and in working out where the most appropriate place to invest the proceeds. This is a good time of year to be spring cleaning your finances generally and could be rolled into a wider review.”
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