Think before you SAYE yes to employee share schemes

There are four main types of company share scheme: Share Incentive Plans (SIPs), Company Share Option Plans, Enterprise Management Incentives (EMIs) and Save As You Earn (SAYE).

Save As You Earn

SAYE, which was introduced in 1980, is the most common type of company share scheme. It gives employees the option of buying shares in their employer at a fixed price after a three- or five-year period. This price can be up to 20 per cent lower than the company's share price at the time the plan is set up. Employees are able to save between £5 and £500 a month into the share plan, although some companies set a lower/upper limit. Savings are made by payroll deduction from your net salary. After three or five years you can buy shares in your employer at the fixed price or simply take the cash.

"The big attraction here is that if the shares haven't done well and the price at the end of that contract is lower than you agreed at the beginning, you can decide not to purchase, and just get your cash back - often with interest," explains Charles Calkin, financial planner at James Hambro & Co. "So it's a relatively low-risk way to save that has the potential to do really well."

As well as the option to buy shares at a large discount to the prevailing market price, SAYE also offers attractive tax incentives. The interest or any bonus at the end of the scheme is tax-free, and you pay no income tax or national insurance (NI) on the difference between the price you pay for the shares and what they are worth.

For example, HM Revenue & Customs figures show that investors in 2012-13 had saved an estimate £240m in income tax and around £190m in national insurance contributions with SAYE schemes.

You may need to pay capital gains tax (CGT) if you sell the shares after buying them. But if you put the shares into an individual savings account (Isa) or self-invested personal pension (Sipp) as soon as you buy them, they will be free from CGT.

Each company SAYE scheme has its own rules about what happens if an employee resigns from the company or is made redundant, but in all cases you should be able to withdraw the amount you have saved.

"A SAYE scheme is particularly attractive as it offers a good way of encouraging you to save regularly and many SAYE savers have done very well out of it," says Mr Calkin. "Take BT (BT.A), for example. Employees in its three-year Summer 2012 Sharesave scheme bought their shares for £1.89. On the first day of maturity they were worth just under £4.70 – more than doubling their money in just three years.

"Those who opted in to the 2016 Sharesave scheme last August saw the price fixed at £3.97. The BT share price is currently around £3.32, so that's not looking like a good deal, but by August 2019 it might be. And if it isn't, the scheme members can walk away from the offer."

Why it's not good to SAYE

If you hold on to shares you have bought through the SAYE scheme after the fixed period, then the investment case becomes less clear.

Without the cushion of the 20 per cent discount on the share price, your shares will be subject to the full volatility of the market. And you could be putting all your eggs in one basket, which in investment is rarely a good idea.

So rather than holding on to your company's shares forever, Mr Calkin suggests moving into a diversified fund or portfolio in line with your attitude to risk, after the fixed period.

"We saw with Northern Rock and Lehman 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 twofold," explains Mr Calkin.

However, even in this worst-case scenario, the money you hold in a SAYE scheme will be protected by the Financial Services Compensation Scheme, up to a value of £85,000.

Investors Chronicle's economist, Chris Dillow, is also cautious about investors owning shares in the companies they're employed by.

He says: "People tend to be overconfident [when investing] and we know that they tend to own more shares in the industries they work for and that are local to them. For example, in Leicester lots of people own Next (NXT) and Dunelm (DNLM) as they are local companies. This suggests that if people are overconfident they will own too much in their employers."

But he acknowledges that the tax advantages and discount share prices available through SAYE could make it a good deal.

"If you're running SAYE as well as other investments then that's fine, but it's not a good idea if you are going to hold it as your only form of investment," says Mr Dillow. "The classic textbook example of putting all your eggs in one basket is Enron. Back in 2001 lots of employees held Enron's shares in their pensions. For some, it was their only form of pension, which meant that when the company went bust they lost their jobs, their pension and their shares."

Colin Low, managing director of Kingsfleet Wealth, also points out that the current bonus rate - or interest - the government sets on SAYE schemes is zero. So if you decide not to buy shares at the fixed price after the contract is up, you will have missed out on the opportunity to earn interest elsewhere. Effectively you could end up locking your money away for several years without receiving any interest, which could lead to inflation eroding the purchasing power of your savings.

"It's a shame that bonus rates on SAYE are zero," says Gabbi Stopp, head of employee share ownership at ProShare. "It's a reflection of what's going on in the broader financial world as interest rates are so low."

But she argues that the benefits of using SAYE are still win-win for individuals and employers: "Employees give a little and get back a little stake of ownership in the businesses they work at, which is great for motivation and boosts productivity for those companies, which also benefits their shareholders."