At a time when many people are looking beyond pensions for their long term financial planning, holding shares or other stock market assets can be a daunting prospect. Recent research from Equiniti shows that of the 6,000 investors surveyed, half of them first acquired shares through a company share plan.
Phil Ainsley, managing director of Equiniti’s employee services business, said:
Many of these investors joined their employer’s all employee tax advantaged Share Incentive Plan (SIP) or Save-As-You-Earn Share Option (Sharesave) plan. With just under a million employees participating in Sharesave and just over a million employees with SIP shares(1), employee share plans provide an important introduction to investing in shares.
Equiniti’s analysis(2) shows that after saving for either three or five years, 48% of employees who acquire shares at Sharesave maturity, choose to sell either some or all of their shares through an immediate sale facility. Other maturity choices such as transferring shares into an ISA or pension scheme, transferring shares to a spouse or civil partner and holding shares in a nominee vehicle are also used. ProShare statistics(3) show that 68% of participants still retain some of their shares after maturity, showing that not only do employees make investment choices at plan maturity but will continue to have an on-going interest in holding shares.
HMRC Statistics show that there are nearly eight million(4) awards/purchases of SIP shares to employees annually, with monthly investment of partnership shares accounting for over half of this figure. ProShare statistics(5) also show that annually over 240,000 employees either withdraw or sell SIP shares.
SIP shares are held in trust on behalf of employees who are able to view their shares and transact online. Major companies such as Royal Mail, Tesco, M&S, GSK and BT offer this plan through which employees can build a savings nest egg and learn about receiving and reinvesting dividends as well as buying and selling shares, helping them to better understand share ownership.
By looking at the pattern of sales and comparing with the share index, we can see that employees with SIP shares take an active interest in their companies’ share prices and are more financially savvy than you might think.
The graph below plots the FTSE 350 share index alongside the daily number of SIP sales carried out by Equiniti on behalf of employees. Although this covers a short period, it was at a time when there were some significant changes to the FTSE 350 index.
It shows that there is a correlation between rising/falling share prices and the number of SIP sales, one indicator that employees who have SIP shares are sensitive to share prices, checking them out regularly before making a decision whether or not to sell. Our statistics show an employee accessing our online SIP dealing pages will, on average, obtain four quotes prior to making a sale decision.
With SIPs, there are various triggers for employees when deciding to sell shares, including reaching three and five-year award anniversaries for free shares (when they become available to sell and there are changes to their tax treatment). The graph below shows peaks in sales activity when such events occur but also that employees do track the share price and take the opportunity to realise cash when they see prices rising.
The average value of SIP holdings per employee is around £9,000(6), although since their initial introduction in Finance Act 2000, some early adopters have built up holdings with values in excess of £140,000. As partnership shares are purchased monthly (along with any monthly matching share awards), shares become available to sell on a monthly rolling basis. There is no capital gains tax payable on any increase in value while shares are in the plan, so we see that employees tend to sell some of their shares whilst keeping the remainder within the plan.
Decisions about when to join SIP and Sharesave plans and how much to invest, when and how many shares to sell and what to do with dividends, provide a great introduction to share investment for employees.
As holdings increase in value, employees need to understand diversification and risks associated with ‘all your eggs in one basket’, then be equipped with information so they are comfortable with making further investment decisions that include share trading, spreading risk and financial planning for the short, medium and longer term.
Features of Sharesave
The scheme allows a company to give employees the right (‘option’) to buy shares in the company at an exercise price that is fixed when the option is granted. The exercise price must not be less than 80 per cent of the value of the underlying shares at that time. Participating employees can save between £5 and £500 per month under a three or five-year savings contract.
After saving for three or five years, the lump sum resulting from the savings contract can be used to buy shares under option if the share price at maturity is above the exercise price. If the shares under option are not bought because the share price has fallen below the exercise price, the employee’s savings are returned. The employee does not pay income tax or National Insurance Contributions on the grant of options, any interest received under the savings contract, the benefit from being able to buy shares at a discounted price, or any increase in the market value of underlying shares between the dates on which the option was granted and exercised. Capital gains tax may be payable if shares acquired through Sharesave are later sold or disposed. Once the employee has obtained the shares the value of these can fall as well as rise and they may not get back the amount invested.
Features of SIP
The plan has four key elements:
- Free shares – employers can give employees up to £3,600 worth of shares each year;
- Partnership shares – employees can buy up to £1,800 of shares out of pre-tax and National Insurance earnings;
- Matching shares – employers can give up to two free shares for each partnership share bought by the employee; and
- Dividend shares – cash dividends on SIP shares can be reinvested and kept within the plan.
All shares are held in trust on behalf of employees with minimum holding periods (at least three years) for free, matching and dividend shares. Employees do not pay income tax or National Insurance Contributions on the value of the free or matching shares given to them provided they keep them in the plan for at least five years.
If shares are taken out of the plan within five years, there are rules around whether or not there is an income tax and National Insurance charge. No capital gains tax is payable on any increase in value while the shares are in the plan. The value of the shares can fall as well as rise and the employee may not get back the amount invested.
(1) 2015 ProShare survey. ProShare is a membership organisation; members receive a free copy of the survey, amongst many other benefits of membership (www.proshare.org)
(2) 2015 analysis of all Equiniti-administered Sharesave plans
(3) 2015 ProShare survey
(5) 2015 ProShare survey
(6) 2015 ProShare survey