Sunday Question Time – ShareSave schemes, what do you do?
How much do you put away in your company’s Share Save Scheme?
Today I wanted to talk about ShareSave schemes, or ShareSave plans as they are often known, which are a great way to save up cash and lock it away for a few years, and potentially get a great return on your investment.
ShareSave plan 101
For those of you who are unaware what a ShareSave plan is, it generally works like this:
- You get to buy shares in the company you are working for at a discount price
- You make monthly contributions over a 3 or 5 year period into a savings account to buy the shares, and can only access the shares at the end of said period
- When you can access the shares after 3/5 years, you don’t even have to buy them. So if the share price has dropped below what you “paid” for them, you don’t even have to buy them, and get your money back.
- If the shares have gone up, or even stayed at the same price as they were when you “bought” them, you can turn a profit because you were buying at a discount price in the first place. So you can keep the shares then either sell them for a profit, or decide to keep them.
- You can only invest up to a set amount and that amount does not renew each year until that particular plan matures. So for example if the limit per year is £3,600 (£300 per month), and in year 1 I put in £150 per month, and year 2 start another plan and I put in £150 per month, then in year 3 I cannot start up another plan as I am maxed out. In Year 4, I could start another plan with a max of £150 per month again, and so on.
This is obviously a great scheme because if the price drops you can just get your money back, and the only real cost is the opportunity cost of having your money tied up for 3 or 5 years, which could have been earning interest in a savings account or appreciating in other assets. Conversely, it could have also been losing you money in those other assets as well. So all in all, whether you should participate in such as scheme if your company runs is a total no brainer.
How much do you save?
The question I would like to throw out there today then dear readers, to gain your collective internet wisdom, is how much would you, or do you save in your company ShareSave scheme? I’ll give you a brief run down of my thoughts and position to get things started:
- My monthly take home pay is around £2600, so I am saving the max I am allowed which is £300 per month into my companies share save plan, and I’ve chosen the 3 year plan. This doesn’t seem particularly aggressive and I am happy with that. Not least because I can’t contemplate the thought of being at my company much longer than 3 years 🙂 (needless to say if you leave the company, you cannot buy the shares any more and you just get your money back!)
- The main conundrum we have is Mrs TFS’s company do a similar scheme (documents snippet pictured above) but for some reason you can save £500 a month into it and her take home is only £1200 (we have a joint account and split all costs down the middle so the actual take home is fairly irrelevant here, but even so, another £500 coming out of the remaining pot of £3500 is still quite a big chunk)
- We can buy the shares for 20% of the current price, which is £4.46, compared to the trading price today of £5.54 – seems like a great deal, huh?
- However £500 over 3 years is quite a lot of money to be tied up in one company, £18,000 to be precise.
- Would we be shooting ourselves in the foot by tying all that money up, remaining totally undiversified in our investments?
- The stock looks to have risen above current levels only 4 times in history (see graph here) and each time looks fairly brief. However there is nothing to say it may not go on a massive tear over the next 3 years.
I think the two options we have are something like this:
- We could be aggressive and go in at the maximum pay in, and be sitting on a lovely wad of cash if the stock price rises, or even if it stays around the same price. This seems rather risky considering the stock being at a high price in comparison to history.
- We could stagger our entry into the plan over the next few years, as I kinda explained above in the last point of the ShareSave Plan 101 section, and maybe do £200 a month for the first year, then see what the stock price does, and maybe then do £150/£150 in year 2/3, or even £200/£100. This will work in our favour if the stock drops as we can reset the share price in the second and/or third years, and hopefully still come out with a profit. (Thanks to ermine for introducing me to this strategy!)
Note: I don’t like the idea of the 5 year plans as the likelihood of staying at any company nowadays for that long seems fairly slim, so with the 3 year plans you have more change of your plan actually reaching maturity before leaving.
What do think readers!? Would you go in all guns blazing with the highest allocation of £500 a month or would you go for option two and spread the risk of the share price dropping somewhat? Or is there a third option that the financial wizards out there know about that I have not thought of?! I’d like to hear about other ShareSave plans as well as I didn’t realise the rules can be slightly different between companies, what have your experiences, positive or negative, been?
Thanks in advance, I’m looking forward to the discussions in the comments section already 🙂
Discussion (21) ¬
> I don’t like the idea of the 5 year plans as the likelihood of staying at any company nowadays for that long seems fairly slim,
Take your point, but leaving a company tends to be a time when a bit of saved dosh comes in handly (particularly if the leaving is unscheduled).
Something I missed in the articles I wrote was that five year plans give you much more time in the market, and statistically, because a SP in general is a gentle updrift with a shedload of noise superimposed (the weighing function and the voting function) the five year schemes are much more likely to come up trumps. Plus you have more money to leverage, because you are saving 60*£x rather than 36*£x. I in the end hedged my final SS, targeting putting the same amount of money to each scheme if I stayed 5 years. I put more per month in the 3 than the 5 year schemes to lean against the shorter savings period. Although I left before the 5 year scheme was done, I got most of it because of the specifics of leaving with voluntary redundancy.
You are not as undiversified in your investments as if you held these shares because of the fact you are only exposed to the upside. Particularly if you can drop previous schemes if the SP falls below the option price. That one-way bet on SP is hard to beat. Do some simulation on previous schemes and how it would have panned out. And then fill your boots if the answer surprises you in the way it surprised me 🙂 I’d always maxed SS once I got out of my twenties, but instinctively. It was only in researching that article that I realised how good a deal SS is!
> Take your point, but leaving a company tends to be a time when a bit of saved dosh comes in handly (particularly if the leaving is unscheduled).
Take your point also, but I won’t be spending the money I don’t put into this scheme, it will be going towards other savings/investments, or even just filling a cash buffer anyway (which is dangerously low right now, or will be after we move house, so this is a big consideration)
I thought I read about the (obviously once you think about it) benefit of the 5 year plans being longer in the market on your article, or maybe it was another you wrote? Anyway, voluntary redundancy would be very nice for me in about 4 years time, I would jump on that 🙂
It is a bloody good deal and you can’t beat that one way bet. From speaking with my work colleagues, it is one that few people are taking it up it seems, I haven’t asked everyone but I would guesstimate at less than 10% of my immediate colleagues are doing this scheme, which I would say was crazy, except that I only signed up this year myself… So I better keep my mouth shut! 🙂
Crazy, eh – the takeup of Sharesave was generally similarly low at my old employer. I didn’t take out the very first one many years ago because I just didn’t believe the terms. And I was skint from having unwisely bought a house 😉
Though to be fair to my colleagues they did snap out of it and hit the last SS I was in that was very good because the stock price took a lot of heat in 2009. So it was an example of the proletariat being greedy when everyone else was fearful, as long as they got a one-way bat 🙂
Hah… I have passed up the opportunity thus far due to saving for a house (deposit) amongst other things. Shame I missed out on the upswing of 2009 to now, I just ran a few calculations and it would have been some serious cash… oh well 🙂
Glad to hear some of your colleagues were wise! I wonder if they were even wiser on what they spent it on?
Interesting company share plans – I would have jumped at this (probably the 5 year plan) if the company I work for offered such a scheme.
Instead, the scheme offered to us allows employees to purchases shares (which are listed on the NYSE) at the current price and the company matches 15% of the purchase. The contributions are capped at £1500 per year, so the company’s maximum match is £225.
You can keep the shares for as long as you want (as long as you remain an employee) or sell them whenever you want.
I think the longest I held my shares for was about 5-6 years and then I sold them just before the share crash of 2008 although it wasn’t actually planned, I was just lucky with the timing!
As for your dilemma, if I had the cash spare, I’d go for option 1, since you can’t lose if the share price goes down.
That is lucky timing weenie!
Your companies scheme actually sounds more flexible but seeing as you can’t invest as much it’s probably a wash in terms of what the better deal was.
We decided to hedge our bets and go with £250 this year, and then top up with another £250 next year, depending on what the share price does.
We have a similar employee stock purchase plan at work, with a 6 month lookback option. Our plan is to put a lot in, net the discount with a lookback, own the company shares for 1 day, then sell, net the profits from the discount/lookback, and buy index funds. It’s free money, but I don’t want to hold single stocks for any serious time frame at all.
Sounds like a good plan. What happens if the stock was a higher price 6 months ago, do you have to buy the shares at the current price? If so would you lose a small amount of money on transaction fees? Are there limits to how much you can put in?
Either way it seems worth the small risk to participate in such a scheme, and the 6 month turnover is also pretty good to keep your money liquid!
The US co I work for just issues you options each year based on the stock strike price on the given day they do it each year.
You get issued them in different qty’s based on your tenure in the business & your position in the company. The issue “vests” at 25% a year, so you can sell the lot after 4 years.
It’s basically free money if the stock price rises, but you lose them if they expire (6 year time window) & the stock price is down. When leaving the company you need to plan ahead & sell the options that are vested ahead of this. You can sell them into cash or personal shares (receiving full paid for shares to the amount of $ improvement). As i’ve stayed with the same company for a long time now I’ve done pretty well over the years with this scheme, & probably will into the future too.
If I worked for a UK company I’d be involved in their share-save scheme as much as I could afford I think (assuming I felt confident the company wasn’t going down the drain!!).
Sounds like a pretty sweet deal LCIL!!!
Thanks for commenting, it’s good to hear about all the different schemes there are out there, I had no idea there was such a wide range of them!
Hi- so I take it you just started, since the limit was upped from £250 just last month? Anyway, congrats!
I’d like to tackle the bullet points you make before getting to your choice, just to make sure our views are aligned.
I don’t know you, but I think that in your case it’s a no brainer. You have to max out. Here is my argument and my underlying assumptions that you can verify.
First off, let’s be clear on what this investment is; it’s a combination of a low-paying savings account, coupled with a free call option (and in the market you’d pay quite a bit for it).
One thing that you do not mention, is whether you can “abort” at any time and get your money back. I know that for my scheme, as long as I tell them before payroll cut-off, I can always get my money back with next pay. So your money is not tied up for more than a month. But, once you get your money back, you can’t get back into the same scheme; you have to wait until the next year. So you do want to stick with a scheme if you can.
Given this, the only possible reason I can see why you’d want to contribute less than £500 is if you don’t think you can sustain it. In such a case you’d want to contribute less as you can’t change your mind halfway through the scheme. It’d be a shame to drop out of such a good scheme because you didn’t do your sums right.
But think of the circumstances in which you’d have to drop out – I can come up with three reasons:
– temporary job loss
– unexpected expense coming up
– you didn’t budget right.
As the author of a blog on early retirement, I’ll assume you’re happy to cross out number 3. As for number 2, unexpected expenses, well, in such a scenario woudn’t it be nice to have stash of cash sitting in an account that’s relatively safe (I think monies in these schemes have to be ringfenced), AND relatively easy to get to? Number 1 will automatically kick you out of the scheme and give you your money back, so it’s self-solving as far as that goes.
So that takes care of that. As for the opportunity cost, why would you give up a possible capital gain that is set today (at 25%), that may get erased, sure, but then you can always get your chips back at any time? What are your other opportunities? In my case, I use my “stocks” budget in my SAYE scheme, as it’s the closest comparable. As I work in the financial industry, the beta of the stock in question relative to the FTSE100 is pretty close to 1. So while diversification is good, I’d have to be pretty darn unlucky not to come out ahead. Also, if you think prices are high now, you do NOT want to buy shares and put your capital at risk!! But you may want a safe savings vehicle, and a cheap option in case prices come up. That’s exactly what your company gives you, and for FREE! BTW I do get some interest in my scheme, in the form of a bonus, but it’s pretty crap.
Finally, onto choices 1 or 2. You say it’s unlikely you’ll be at the company for more than 3 years. I think that means you have to go all out right away, no? Otherwise you have to stay for 4 or 5 years… Cost averaging is great, but you’re timing the market, which is always uncertain, but in so doing going against your expectations for how long you’ll be willing to stick with one employer, which you should have a much better grasp on. So I’d pick option 1.
Mathieu, first of all let me say thanks for writing such a comprehensive and well considered reply… thanks!
OK so let me clear up one key fact as not sure I made it clear in the post:
This is my wife’s company’s plan we were talking about investing in, I am already maxing out mine at £250 per month which started in January. I will no doubt max it out again next year for another £250 seeing as they doubled the limit, and possibly have to sweat out 1 more year of employment to let that mature, if the prices are doing the right thing! (I didn’t realise that is why my wife’s one allowed more, I just assumed it was different rules because of a different company, so thanks for shedding some light on that one!)
That said, our views are pretty much aligned and we very nearly went for the max, but didn’t because of the following reasons:
* We talked about it and she said she would be happy to stay at this company for 4-5 years, so there is no downside of not maxing out because of not getting getting to the end of next years scheme, if things plan out the way we think they will.
* Let’s say you go all in at £500 a month. If the stock goes down and you pull out, say in 9 months time, and you are on a 3 year plan, it was my understanding that you cannot start up another plan the following year, or the one after. I.e. even though you are out of the scheme, your £500 a month allocation is still taken up and you can’t join another scheme until your other running one(s) that you’d maxed out have finished. I am not 100% sure on this so if someone can clarify, that would be great (In fact I will stop being lazy and google it shortly).
* Looking at the share price graph of the company, although it is in a general sense linked to the main indexes and world markets, it seems to have an awful lot of noise in there as well. So personally, I don’t think you can say that my returns from investing in (say) a FTSE 100 tracker and this one individual stock would be similar. I could easily make gains on the total stock market but a loss (i.e. break even) on this one company. I am not an investor in any sense of the word, so maybe I got this one totally wrong, again, I am happy to have my mind changed on this one (although it’s a bit late for this year, as we’ve already submitted all the forms, bloomin time limits 🙂 )
Your logic with situations 1,2 and 3 is impeccable and I clearly agree with all that, so thank you again kind sir for taking the time to write in!
Sure – I didn’t know about not being allowed back in only after the current scheme matures. I wonder if this is something new, in which case I’ll have to check my own plan. I know that in the past (last year), I was able to get out and right back in. That’s worrying to me; the flexibility was a good feature.
On your last point, it’s really uncertain what happens to the markets so you’re right to not take my view at face value. It’s probably a question of personal temperament, but to me an option always sounds better. Perhaps because I’ve never done that well with straight-up share investing…
In any case I’ll keep reading your blog and its MMM cousin; the biggest determinant for early retirement is the savings rate in any case, and living in London I can never get too much external motivation to help me!
Hi again Mathieu!
OK I’ve double checked and thankfully I have fabricated that rule in that stupid brain of mine! So no need to worry, and apologies for making you do so. I think I was just thinking of the following line:
“However, if you withdraw before the completion of the savings term you lose the choice to buy shares at the special discounted price”
Which is of course something completely different to what I said, and is a perfectly reasonable rule.
So I presume if the share price bombs (more than the 20% discount, say?) in the first year you can just cancel the scheme and restart at full whack the following year.
Yes… this has got me thinking again now though, at what point do you cancel? If the price drops 20% it is good to reset the price and start again, but then you will have to wait an extra year to make any potential gains, whereas if you leave the scheme running there is every chance in the 2 years remaining that the price recovers again and you get all your money back plus profit a year earlier.
What strategy have you been taking with this Mathieu if you don’t mind me asking? Any drop is a reset or do you only do it if it drops over a certain threshold? Obviously, if we had another 2008/09 style crash it’s a no brainer, but there are a lot of “grey area” situations in between that and the price staying the same/going up.
One other positive if you withdraw, even on a slight drop in price, at least you would get some of your money back when you quit, to invest in other things such as an ISA, put towards a deposit for a BTL, etc…
Thanks for reading and again for commenting, and loving the fact you’ve referenced the MMM cousin… 🙂
Good luck with your savings and investments and drop by here any time you want my friend!
Hey TFS,
I was all geared up to set up a compelling comment for you, but after reading Mathieu’s first class comments, I think I’ll keep it brief!!!
I would max out and take Option 1 for the reasons Mathieu explained. The risk:reward ratio just plays in it’s favour 100%. You can withdraw if your circumstances change or if the Share price drastically plummets. You have in theory an unlimited upside. The share price could go up 5%, 10%, 25%, 50%, 100%, which you could benefit from at the end of the period. The down side is covered by a 20% buffer, which minimises (not eliminating) the risk. You can decide to keep with it and get your contributions back, or sell at any point you’re uncomfortably with. The 20% gives you some nice wiggle room, and the option to withdraw is hugely reassuring. For me it’s a no-brainer!
I did a SS at my company, and thanks to the scheme it got me into the world of working towards Early Retirement and FI. My 20% discount brought the share price down to £2.02. The company were bought out 2.5 years later, but they allowed us to contribute a further 6 months if we wanted to (which I did). I maxed out my allocation at the time (£250pm). The agreed sale price was £4.32, so I over doubled my money in the end. I was VERY lucky for sure. I weighed up the potential risk and reward prior to going for it, and it made sense to go all out. I had SO MUCH to potentially gain and very little to lose.
Good luck with it all!
Cheers
Huw
Thanks for the comments Huw!
That was a nice touch with the way your SS panned out! Hopefully something similar will happen for me and the Mrs. As mentioned I’ve only gone in “half stakes” this year but will definitely top up again to take the full amount when it comes around next year.
Cheers!
Another point to raise is if you are made redundant – not that you want to – you get to exercise the share save early with whatever money is in your account saved.
That did me a good trick when it happened to me.
I bought a chunk of shares every year rather than maxing out in one year, always stuck to 3yr plans. it meant I had a trickle of shares over the years and now have a sizeable chunk of shares and collecting the dividends and working nicely towards FI.
Sweet as honey SparkleBee!
It seems to me as long as you are in the scheme you are already a winner, no matter what strategy you employ. After that it’s just fine tuning and a bit of luck depending on how much you make out of it.
Its a win/win – or has been from my experiences. If the share price is really poor. Just cash in the money and use it to pay into your next yearly plan or invest that money into other shares.
My current plan has just been closed by the fact that the business group I work for has been sold by the parent, so I can cash it in – and given that the share price for the plan has crashed through the floor – I will use those savings to buy shares in something else more passive income friendly while I can.