Why you shouldn't bank on your job

Published on Friday 6 February 2009 20:20

THOUSANDS of workers are counting the cost of investing in employer share schemes after taking heavy losses over the past year. Employees have seen the value of their company shares plunge in recent months, but the extent to which some workers were staking their financial futures on the fortunes of their employer is only now becoming clear.

Earlier this week, The Scotsman revealed that up to 15,000 employees in one share-based scheme had seen their savings wiped out by market turmoil. The HBOS Sharekicker plan, which allowed employees to buy HBOS shares with their bonuses and get 50 per cent more free shares after three years, is no longer offered following the completion of the Lloyds TSB takeover last month. The scheme was promoted as low-risk on the basis that the company's share price would have to fall by a third before shareholders risked losing their original investment – but the value of HBOS shares fell by 90 per cent in the year before the takeover.

One former HBOS employee, 60-year old Jim Shields, saw the value of his HBOS share pot plummet from 250,000 to less than 25,000. Like many others, Shields and his wife, who also worked for the bank, had invested their annual bonuses in the Sharekicker scheme in the hope of boosting their nest egg.

Shields believes he was misled by the company and other employees have made similar claims. But experts point out that, while share schemes have their place, workers putting them at the centre of their financial planning are neglecting the most basic principles of investment. Julie Richardson, head of employee share ownership at ifs ProShare, said: "ifs ProShare has always recommended that employee share plans should form a strong part of any employee's savings profile, but we are also very clear that investing all your spare cash in a share plan may not be the best use of funds," she explained. "The old adage of not having all your financial eggs in one basket applies to share plans as much as any other form of saving."

Alison Paul, trust and tax partner with Turcan Connell, said it was easy to see why bank workers sought to take advantage of their employer's share offers in recent years. "The mindset was that banks were booming, the schemes were tax-efficient and it was supportive of their employer, so people were understandably keen to do it," said Paul. "But, with the benefit of hindsight, some people lost sight of the basic principle of diversification."

Single-share investing, even through a tax-friendly discount offer, is always a high-risk strategy, according to Adrian Lowcock, senior investment adviser at IFA Bestinvest. "Historically, share incentive schemes create loyalty to the company and are a good way of saving and investing, but you should never have more than 10 per cent in one company," said Lowcock. "You have to use it effectively, take profit when it is there to be taken, use your capital gains allowance and diversify your investments."

Employees investing everything in shares issued by the company that employs them are especially vulnerable when the company hits difficulties. "People are tying their employment and their savings together," said Paul. "They stand to lose twice over in situations like this if they lose their jobs as well, so it's a potential double-whammy."

As Richardson pointed out, share incentive schemes are a good way of saving and investing when used sensibly. One of the most widely-used is the Save As You Earn (SAYE) plan, which allows workers to save between 5 and 250 a month for either three, five or seven years. At the end of the term, the pot of money has a tax-free bonus added to it and employees can use it to buy shares in the company (usually at a discount of around 20 per cent to the price when they started saving in the scheme) or cash in their savings and still benefit from tax-free interest.

The tax advantages are attractive – and in the current climate the prices are too – but all share-based schemes should be considered as part of an overall financial plan. "With share prices low at the moment they might become good value in three to five years, so people with SAYE at low prices may benefit if they do it appropriately," said Lowcock. "But just because a scheme is good doesn't mean the principles of diversification and asset allocation should be ignored."

And ifs ProShare recommends that employees considering a company share incentive scheme should read all the literature they receive thoroughly and if they have further questions there is usually a helpline available for additional information. "Once they understand the plan they can then decide on whether it is the right investment choice for them and their circumstances," said Richardson.