Diversify away from employer shares?

furrygiraffe

Hi
Long time lurker, first time poster. I've been reviewing our financial situation and just want to see if I've missed anything or am doing something silly!

Our situation:

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Married, 3 kids (2 year old and 6 month old twins). Both me and the Mrs are 40.

We are both higher rate taxpayers, although the Mrs will stop working after maternity leave

Tax free savings are £15K in cash ISA (Halifax 3%).

£2K cash in Savings account (Egg 2.5%)

£50K of shares in my employer. Paying a dividend rate of ~7% of current share price. Good capital growth in recent years. Of the £50K worth of shares, £25K are free of income tax/NI (from previous SIP's), the remainder are still liable for income tax in various "blocks" according to when they were purchased

5 year SAYE plan matures in 2013 (will be around £10K)

£190K mortgage on a £430K house. Lifetime tracker BOE+1.1% (i.e 1.6%). Capital repayment. Roughly 12 years to run.

No debts (except mortgage)

£13K (gross) bonus this month. Company has a BOGOF for shares under a SIP

Its pretty clear that I am heavily exposed to my employer... I've been with them over 15 years and have built up a sizeable shareholding through previous SAYE schemes, and SIP's... I have decided to diversify my money away from my employer (in a tax efficient way)

I believe I have a decent amount of cash saved, so now I'm looking for investments which will give good capital growth.


This is what I was thinking of doing...

1) Use £2.5K of bonus for an eternity ring for the Mrs (gave birth to twins in Dec 2010). Not money saving, but life is for living!

2) Purchase £1500 of employer shares (under SIP, this comes off my GROSS bonus amount). Company does a Buy-one-get-one free. No brainer, even with my diversification strategy.

3) Sell as many employer shares as required so that the gain is <=CGT allowance for this year. Not sure about ISA or spouse cgt allowance as shares are in an internal market and you must be an employee to buy

4) In future years, sell as many employer shares (which are free of income tax/NI) until the gain = CGT allowance. Subject to those shares being available free of income tax/NI

5) Open SS ISA (fidelity or HL?) with £5K (remainder of ISA allowance this year).

With regard to #5. I am thinking of 3 different tracker funds (HSBC ones look attractive due to low TER). I am thinking of putting the bulk of the amount in HSBC Asia Pacific (ex Japan) tracker, with smaller amounts in HSBC FTSE 250 Index and HSBC American Index

Also, is there any major difference in costs/service between fidelity and HL?

Anything else I should think off? The money I am investing is for the long term so I'm thinking NS&I should be beaten by the market?

Many thanks for your time

Lokolo

1) http://www.youtube.com/watch?v=5Ur2er-STls (Not safe for work really, but if you like Family Guy, brilliant scene)

2) Yep thats what I plan on doing with my company (but they limit the BOGOF to £75 a month)

3) Yep that's good, although £50k I doubt was bought at such a low amount that the I imagine CGT wouldn't apply for a lot of it.

4) Good idea, but soon enough you will end up without any share.

5) That's your choice as to what you invest in.

Cost wise - not much between HL and Fidelity. I use HL, other users use Fidelity. I like HL and wouldn't move to Fidelity until HL get too expensive.

NS&I have a £15k limit for index link.

You haven't said anything about your pension.

alanq

furrygiraffe wrote: »

The money I am investing is for the long term so I'm thinking NS&I should be beaten by the market?

I wouldn't be so sure. As a higher-rate tax payer where else are you going to get a tax-free guaranteed return above inflation with almost instant access? NS&I index-linked certificates should surely be part of your diversification plan.

ermine

Totally agree that you need to diversify out of shares in your employer. I take advantage of SAYE and did use SIP to the max. However, as soon as the shares come unembargoed and I have more than about £1.5k worth (these come out fo the embargo monthly) I sell and I have always sold the SAYE option on maturity if it's in the money.

The reason is that it is a very bad idea to be exposed to the shares in your company. Two years ago the SP of my employer dived, because of financial mismanagement in one large section where the highly paid CEO appeared unable to see that revenue was not the same as profit.

So far so good, just a SP hit, but all of a sudden some bucnh of evil America HR 'professionalls' were hired who created a performance management system with the aim of stressing a large number of people to leave, or at least debar them from the terms of volutary redundancy schemes that also came thick and fast.

It's a bad ide to have the risk of you net worth take a major dive at the same time as you lose your job. So while SAYE and SIP plans are almost always no-brainers to max out for HRT payers, it also pays to watch your back and manage down the resulting high exposure to your employer's financial performance.

Jegersmart

Hi Furry

Yes it would be good to know about your pension situation.

Personally I would only use a tracker fund in certain circumstances - in UK terms only when the FTSE 100 is below 4800-5000 for example. This is because if you had invested in a 250 tracker 4 years ago you would have made !!!!!! all, with an approx 50% drop in the middle. The point is they are cheap but blind to changing scenarios. I would and do pay more for actively managed funds - and there are plenty of them. I use the Fidelity platform but there are others. Diversification is a great tool and would agree that it does look like you need to do that. Holding shares in very few companies can be risky as you realise.

Some examples of funds that you could consider are M&G Global Dividend, Blackrock European Dynamic, Aberdeen Emerging Markets and so on. It just depends on your appetitie for risk, focus and goals.

Good luck - you seem to be in a position where a negative economic "event" could be weathered without too much hardship!

atush

I agree with diversification, but would keep some as the yield is good.

I like the idea of emerging markets, plus USA, plus fts250 in general but haven't looked up thos funds performance so can't say if I would invest in them. But at least they are collective, and will spread the risk better than what you have now.

I personally also want to know about pension, but would also consider overpaying your mtg to get rid of as much as possible while rates are still low. I would also consider taking out investment trust savings plans for the children. I started mine when my twins were a bit older than yours- wished i'd started them when they were 6 months old ;-) I was too busy breast feeding and changing nappies lol.

furrygiraffe

Many thanks for your replies... now to answer some of your questions...

atush wrote: »

I agree with diversification, but would keep some as the yield is good..

This will happen anyway, since, at present, £25K worth of shares I can't sell (unless I want to incur income tax/NI), and every year I buy more (due SIP tax advantage and BOGOF offer)...

atush wrote: »

I like the idea of emerging markets, plus USA, plus fts250 in general but haven't looked up thos funds performance so can't say if I would invest in them. But at least they are collective, and will spread the risk better than what you have now.

The reason why I chose them is to diversify the risk across regions in the world... with a strong bias to Asia-Pacific (but that of course is my humble opinion of where world growth will come in future).

atush wrote: »

I personally also want to know about pension, but would also consider overpaying your mtg to get rid of as much as possible while rates are still low. I would also consider taking out investment trust savings plans for the children. I started mine when my twins were a bit older than yours- wished i'd started them when they were 6 months old ;-) I was too busy breast feeding and changing nappies lol.

My mortgage costs just 1.6% on a lifetime BOE+1.1% tracker... I get a better return in my cash-ISA, not to mention liquidity! Whilst rates are so low, I'd prefer to use such money to invest in the long term for capital growth

I have 8 years final salary (8/60ths) with my employer (terminated in 2004 for future accrual, but still based on final salary - not salary as at 2004) and since then I've been on a DC scheme. I pay 5% of salary, employer pays 15% (which they increase as I get older)

The "estimate" of my DC pot at age 60 is approx £670,000... although what it will be in 20 years time is entirely down to the market of course.

The Mrs has always been on final salary (big pharama, last of the private companies who still do this) - although as I said earlier, she will quit work for a few years after maternity leave. I believe she has done some AVC's before the kids were born.

opinions4u

I played the employer share game brilliantly for many years. Sharesaves, bonus taken in shares instead of cash, free shares etc.

Cashed a few in to buy the occasional car etc.

Started 2007 with somewhere in excess of £40k in shares in the same company.

By the end of 2008 they were worth around £2k.

I always knew I should diversify. A mixture of laziness and greed meant I never quite got round to it. Indeed, I caught the falling knife and bought a few more on the way down!

So yes, you really should diversify. Care around CGT, but spread your risks.

Jegersmart

furrygiraffe wrote: »

The reason why I chose them is to diversify the risk across regions in the world... with a strong bias to Asia-Pacific (but that of course is my humble opinion of where world growth will come in future).
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Sure - fwiw I happen to agree mostly - however my point was that there could be far better options than a tracker fund. There are many out there and research is needed. If you look at the difference between a FTSE ALL-Share/250 fund and something like Marlborough Special Situations fund for example over short, medium and long term then the difference is night and day.

BTW I should mention I am not an IFA, have no affiliation with any fund or provider - I am a retail investor/trader looking out for myself.

atush

The reason why I chose them is to diversify the risk across regions in the world... with a strong bias to Asia-Pacific (but that of course is my humble opinion of where world growth will come in future).

Also hae a look at India (due to have a larger population than China and is democratic) and the Latin america countries incl Brasil.

My mortgage costs just 1.6% on a lifetime BOE+1.1% tracker... I get a better return in my cash-ISA, not to mention liquidity! Whilst rates are so low, I'd prefer to use such money to invest in the long term for capital growth

You aren't looking at the whole pciture here. You also decrease the term (and the long term interest on the debt) and it is risk free. Easier to do when rates are low as it makes a larger impact so that when rates do rise you'll have less mtg to pay interest on.

I am not saying to do this with all your money, just a small proportion. Even 100 quid a month makes a huge difference in interest paid over the term. We OP as well as pay 26% into pension, cash reg savers, SAYE, S&S investments, invetment trust and a direct share investments.

Your pensions look good, even your Money purchase one at 20% and increasing. Don't know how they are performing, are you allowed to choose your funds?

gozomark

furrygiraffe wrote: »

with a strong bias to Asia-Pacific (but that of course is my humble opinion of where world growth will come in future)..

I'm sure you are right, but thats not whats important - whats important is that you expect even higher growth than the market does