Jeff Salway: Bank workers know pitfalls of share perks

FOR Bank of Scotland and Royal Bank of Scotland workers, the chance to buy discounted shares in their employer seemed a no-lose deal.

Schemes such as the Sharekicker plan at HBOS, which allowed employees to buy the bank’s shares with their bonuses and get 50 per cent more free shares after three years, were understandably popular prior to the banking crisis.

In December 2007, the HBOS share price was 741.5p. A year later, after its takeover by Lloyds, it had plunged by more than 90 per cent to 69p, giving thousands of employees who had taken up the Sharekicker plan not only their jobs to worry about, but their savings.

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The protection they had banked on – a guarantee that the share price would have to fall by a third before they risked losing their capital – suddenly seemed very flimsy.

I remember talking to one reader who had seen the value of his HBOS shares disintegrate in weeks, plummeting from £250,000 to little more than £20,000.

The problem was that he was among many who, confident in the prosperity-laden future of his employer, failed to spread their savings across different assets, instead investing much of their spare cash back into the very company they worked for. The tragedy is that when things went pear-shaped, many lost both their jobs and their savings.

They could be forgiven for feeling cynical towards Nick Clegg’s proposal for employees to have a universal right to ask for company shares. Inspired by retailer John Lewis, the Deputy Prime Minister last week talked of a democratic share ownership culture where employees are given extra incentive to perform and in turn benefit from tax breaks.

He sees share ownership as a way for individuals to hold employers to account, helping them act on excessive pay at the top of the hierarchy and have a greater say in the way the company is run. There’s some sense in this, but as so often with Clegg’s proposals, it just doesn’t work in practice.

How much say in the running of HBOS, RBS and Northern Rock did the thousands of employees who owned shares in those firms have? Not even 100 per cent take-up would give a workforce sufficient ownership to earn a voice loud enough to be heard. Groups of individual shareholders can’t come close to the ownership held by pension schemes and other institutional investors, who have been found badly wanting as far as accountability is concerned.

Many firms already offer people some form of share-saving scheme, Save As You Earn being the most common, so it would take a very generous – and doubtless politically unpalatable – tax perk to encourage more people to buy their company’s shares.

There is a case to argue for improved access to employee share ownership, but a “right to request”, as Clegg suggests, is pointless.

Retirement may need a rethink

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LOWER investment returns and plunging annuity rates mean it has been a while since there was a good moment to retire. Yet this week it became even worse after the 15-year gilt yield fell to a record low of 2.25 per cent, down from 2.98 per cent in September and 4 per cent a year ago.

This gilt rate is used in determining the maximum amount of income you can take from a pension drawdown arrangement (where retirees can take some cash from their pension while leaving the remainder invested).

Pensioners in drawdown have suffered a retirement income cut of almost a third, says AJ Bell, a self-invested personal pension provider.

The problem is exacerbated by government rules introduced last year reducing the maximum proportion that can be drawn down from 120 per cent of a comparable annuity to 100 per cent.

The drop will hit not only new drawdown customers but those whose income levels are up for review, many of whom will lose out on thousands of pounds of income.

For example, a 65-year-old man with a £250,000 pension fund retiring next month and going into drawdown will be able to take income of no more than £13,750, down from £20,400 in February last year, according to AJ Bell.

If you can wait for markets to improve or gilt yields to rebound – which they will – or even for the government to restore the 120 per cent maximum, which is less likely, it’s well worth considering a delay in entering drawdown.

But either way, think seriously about getting help from an independent financial adviser with experience in these matters, because the wrong decision now could damage your chances of a comfortable retirement.