Save as you Earn 2015

superkopite

Hi Guys,

I am looking for some advice...

I work for Tesco and regularly enter into the companies Save As You Earn scheme. With the share price what it is I cancelled all of my open schemes a few weeks back...

This years scheme opens tomorrow and the option price is likely to be somewhere close to £1.50 per share. The current price is £1.85.

My question is, is it worth me investing the full £500 per month for 5 years. The 5 year term also carries a bonus of 0.6.

My thinking is that even if the share price where to remain the same, at the end of the five years I would have shares worth £37,000 with £7000 of that being profit.

If the share price was to get back to where it was a few months ago, £3.20, I would be looking at a return of £64k with £33k profit.

Am i looking at this too simplistically, are there other things I should consider. Should I maybe consider the 3 year term?

Many Thanks

bowlhead99

I would forget about the share price growing massively in 5 years with you doubling your money. Nice idea but don't plan for it. If the market thought there was a good chance of the share price being £3.20(70% higher) in 5 years time without a lot of risk of it going the other way instead, the current price would be higher than it is. But that isn't to say share schemes can't be very valuable - I'm a bit jealous that I can't currently access one myself.

Ordinarily, someone shouldn't have a large proportion of their wealth tied up in the company they work for, because investing in single companies (rather than broad portfolios of companies through investment funds) is quite risky, and they stand to lose a heck of a lot if they lose their job at the same time as the company's fortunes in the stock market decline.

However, this is not one of these win/lose bets, it's more of a 'win'/'breakeven' bet, which is a great type of bet to have the opportunity of making.

I suppose the downside risk of tying up your money for a long period is that if the company ends up at 1.50 or below, which is possible, and if you don't end up exercising the share options on maturity, you might not do as well as inflation. However as you're dripping the cash in slowly, only about a fifth of it is tied up for four to five years and a similar amount, relatively, only gets put in right at the end. So, the return can end up pretty high compared to other investment opportunities you might take. Another risk is that if you leave the company after three or four years and can't access the share options, you have £20k built up that has no real growth on it, when you could instead have had thousands of pounds invested in stocks and shares ISAs tax free with a whole bunch of dividends and growth on it, if you hadn't taken the scheme.

The best return, on paper, is likely to be the five year scheme rather than the three. Over three years the company share price will bobble around and hopefully go up. Statistically over a longer period of time the share price is more likely to go up and so your 'win'/'breakeven' bet is more likely to be 'win'. But it does mean you can't access that potential win for longer, and if you have to forfeit if you leave early in certain circumstances then you perhaps have more to lose and it would have been safer to have taken the quicker 3 year scheme.

I think if you have the £500 available, a simple thing to do to keep your options open a bit would be to do £300 in the five and £200 in the three. Or £250/£250 or some other combo.

Then you are not waiting for the end of the full five years to cash out. And if the share price drops to £1.50 next year and the new option schemes become available at a new £1.20 option price, you can cancel just one or the other of your two 'out-of-the-money' schemes to participate in the new one, while keeping the other one rolling. That way, you don't have to reset the whole maturity clock on all the money to participate in a new better deal.

Some people would build themselves a little 'ladder' of maturity dates by starting off investing less than £500 in a combination of 3 and 5 year plans now and also putting £100-£200pm away elsewhere. Then next year you have capacity to to set up another couple of 3 and 5 year schemes to be maxed out at £500 ongoing and be able to easily afford it because you saved a bit of money independently in the first year. You'd then have plans maturing in 2017,2018,2019 and 2020. That might spread out your potential risks and rewards a bit more evenly than just going all out for £500pm maturing in 2019.

Which term, or combination of terms, appeals to you depends on what you think might happen to the share price and perhaps more importantly your longevity with the company and ability to keep funding the amount of cash you committed. As a gambler I would be tempted to go all out for the max cash in the longest term and hope it paid off. But it would be quite valid to do other things instead.