Works share scheme and reinvesting privately

Sailtheworld

MartialArtMan said:

Sailtheworld said:

Just a thought. You're 100% reliant on your employer for your income. With little in the way of pension provision at age 44 you're also very reliant on their contribution towards your retirement income too. And, just for good measure, it looks like most of your investments are in your employer's shares.

It's good you have such confidence in your employer because that's some concentration of risk.

If you have a sound strategy for securing a sound future I'm all ears, just doing the best I can....

You're 44 and your net worth is low (possibly negative) so forget about compounding coming to the rescue to give you a comfortable retirement. You need to spend less and save / invest more - it's now urgent.

If you can do that then you obviously benefit from increased wealth, you also train yourself to live on less which means you need less wealth to maintain your standard of living in retirement and you reduce your reliance on your employer.

Company shares are nice - cash is better IMO especially when pretty much 100% of your investments are in your employers shares. Doesn't mean you have to sell them - just make a big effort to increase your investments so they form a smaller part. To an extent they're trees that are preventing you from seeing the forest.

There's no magic investment to be found here to compensate for having spent 100% of everything you've earned to date. No reason 17th August 2020 can't be the date you start doing things differently though.

MartialArtMan

Well I have already made changes: 
" At the moment I am putting savings into a Moneybox S&S ISA (this is a  minimal amount maybe £30 - £50 pm) and into Premium Bonds (I have put £6k into them so far this year). I've also upped my pension contributions at work to 10% plus their 6.66% contribution and increased my mortgage payments by an extra £100 per month"
Bringing up two daughters on a single income has already taught me how to budget and not spend excessively. The shares are given to me so I'm not putting any money into them, my pension contributions seem a no brainer as I can save more for less as it's taken pre tax but yes I appreciate that I need to diversify. I have my premium bonds and Money box which equates to approximately £8k. Perhaps I should look at a Vanguard savings account too, it's just such a minefield I don't really know where to start!  

kangoora

Sounds to me like you a ) don't really have a target and b) are casting around for a plan without really knowing what you want to achieve. As you are aware, 'hardly any pension' at 44 is not a good place to be. Put another way, you are 50% through your working life collateral (22 - 44) and only have the remaining 50% (44 - 66 ish) to sort that out. On the plus side you should now be at or close to your peak earning potential - or it could get better/worse. Before doing any saving I'd recommend 3-6 months of spending/household costs saved somewhere safe as an emergency fund in case of redundancy, illness etc

Have a look at 'The Number' thread on Pensions board, no need to read it all . None of the below is 'advice' as such, just pointers towards planning. You'll need to tailor it to your circumstances obviously. You need to establish:

• what level of income you want in retirement, excluding mortgage (paid off presumably), commuting costs, pension payments etc. Include some major costs such as car replacement, forecasted household refurbs, major holiday plans (motorhome?). Some people (we did) set a minimum, comfortable and luxury incomes.
• You then need to work out how much you need to save to achieve those targets, using 3-4% of your final available liquid assets plus any pensions etc gives a decent starting point. This could be a startlingly high figure depending on a) above. If you need £30k/year then you probably need somewhere between £525k to £700k. Note, assumes you work until retirement and you get £9k state pension (rough figures). If you want to retire earlier then you need more money to cover that gap (£30k/year)
  
• Then it's a matter of working out how much you need to save each month/year. Personally, if you can afford to NOT pay any higher rate tax then that is a good target. Putting extra into pensions at 40% tax relief is excellent VFM, dependent on if you are 'salary sacrifice/company refunds some NI saving' you can effectively invest £100 in a pension for a £53 cost (someone could provide the exact figures if you want to disclose those details).

All of the above is relatively easy to plot out with even basic excel skills, I ignored inflation in mine (lots don't) as I made the conscious decision to assume investments beat inflation by x%. You can make it as complex as you like however.

I guess you have a decent salary, getting free shares and being able to stash £6k in premium bonds already this year points to that. In the short term I'd consider cashing in some of your available options and load your pension such that you take your taxable pay below the 40% bracket - as well as withdrawing that £6k from premium bonds and using it for that purpose UNLESS that is part of your emergency fund. This is what I did with my share options, took some 5 x gains on options, then put them into a pension which increased them again by a 40% uplift (well, 20% uplift and 20% received back from HMRC).

A comfortable retirement is do-able even if starting late but you may need to consider short term pain for long term gain i.e. not taking that lease on the brand new BMW/Mercedes/Landrover and instead electing to buy a 3 year old Astra, cutting back on 2 expensive overseas holidays/year, cutting back on designer gear, less eating out - whatever you decide is possible/bearable. One of the biggest impacts on pension savings is lifestyle, if you can live on 50% of your salary you can retire very early (all other things going well) as you can a) save much more and b) need to save less money overall, if you need 100% of your salary to live then you will never retire or face a much curtailed lifestyle when you do finally retire.

Finally, stick around the forums, read threads and remember - there are no dumb questions, only dumb people not asking them

Edit: Crosspost, removed spouse references

Sailtheworld

The urgent part is getting the savings ratio up (which you've started). You could start tracking that rate.

Plenty of time to worry about where to put all the extra wealth. You know you're doing something right when your problem is knowing where to stash it all.

MartialArtMan

kangoora said:

Sounds to me like you.....

Sincere thanks for a very comprehensive reply it's given me plenty to think about, namely my goals which when I apply the 5 Whys approach essentially comes down to securing my future in my retirement. This has helped me to focus on where to allocate my money (although I'm still working on the details of where exactly). Had a play with the numbers game on my required pension amount and if I increase my contribution by another 4% I'm well on track to a decent retirement income albeit that will be retiring at 67. That said if I can pay off my mortgage by time I'm 55 I can squirrel away money that I currently pay on my mortgage for a few years and that should hopefully see me retiring a little sooner. 
I've made some inquiries at work regarding the share scheme and we use a LTIP and was told "Any gain made from the exercise of share options would be subject to PAYE income tax and national insurance contributions through the payroll. This is because the scheme that we operate is not eligible for tax relief with the HMRC." Although talking with someone else he said something like we can pay the tax when the share price is low which will mean when the value of the shares increase in value it will not have an impact on the amount of tax you have to pay as it has already been paid. (?)
Thanks again and yes I will have to start hanging around the boards more to become a bit more savvy

bowlhead99

MartialArtMan said

I've made some inquiries at work regarding the share scheme and we use a LTIP and was told "Any gain made from the exercise of share options would be subject to PAYE income tax and national insurance contributions through the payroll. This is because the scheme that we operate is not eligible for tax relief with the HMRC." Although talking with someone else he said something like we can pay the tax when the share price is low which will mean when the value of the shares increase in value it will not have an impact on the amount of tax you have to pay as it has already been paid. (?)

If the scheme isn't a special HMRC approved one then effectively when they give you free or cheap shares and they vest, allowing you to exercise your options you are taxed on it like regular income, paying tax and NI on the 'profits' - the value that you got by virtue of your employment. 

However, if that happens when the shares are at a relatively low price, your colleague was right that if the shares you bought go up in price later, there is no further income tax or NI levied, because the value you got from your employer has already been set in stone.  What your colleague didn't mention (perhaps because it is not very relevant to him) was that although there is no further income tax and NI if the share price changes later (because the income tax and NI has already been levied), you may have 'capital gains' tax to pay.

For example, say you get shares that are worth £10k and you pay whatever tax and NI it costs to get your hands on them. After holding on to them for a few years, they're now worth £25k and you sell them. You have made a 'capital gain' of £15k on selling them (difference between sale proceeds and value when you got them), so unless you have other 'capital losses' in the same tax year , you'll need to pay capital gains tax.  Fortunately the first approx £12k of gains made in any one tax year are exempt so you would only have to pay CGT on the excess  (it's actually a bit more than £12k exempt, and generally increases each year). You could split the sale across multiple tax years to reduce the amount chargeable to CGT in any one year, and might be able to manage it within the exemptions. And even if not, CGT rates (of 10% within basic rate band and 20% for higher rate taxpayers) are much lower than income tax plus NI.

You could avoid that further CGT by making your gains inside an ISA, but as it's not an HMRC approved scheme, the only way to get the shares into an ISA is to sell them, put cash into an ISA, and buy the shares inside the ISA with that cash.

MartialArtMan

bowlhead99 said:

You could avoid that further CGT by making your gains inside an ISA, but as it's not an HMRC approved scheme, the only way to get the shares into an ISA is to sell them, put cash into an ISA, and buy the shares inside the ISA with that cash.

Thank you for your reply. Your comment above brings me back to my original question as to whether I should cash in my shares when they are low to minimise the amount of tax I pay then re-buy through a stocks and shares ISA? 
When I spoke to someone about cashing out shares when they are low as opposed to high he said that the tax is only relative to the cash value you are withdrawing whether your shares are worth £10k or £20k (that might not make much sense, maths is not my strong point and I struggled to get my head around it at first but think I got there in the end, or did I?). 

MartialArtMan

Actually rereading that back I still can’t understand that logic if I cash in my shares at £10k at 40% that will cost me £4K in tax, if I cash in the same amount at £20k it’ll cost me £8k in tax. Where as if I put the £6k into an ISA and it doubles it’ll be worth £12k 😂

Well that answers that question! 

bowlhead99

MartialArtMan said:

bowlhead99 said:

You could avoid that further CGT by making your gains inside an ISA, but as it's not an HMRC approved scheme, the only way to get the shares into an ISA is to sell them, put cash into an ISA, and buy the shares inside the ISA with that cash.

Thank you for your reply. Your comment above brings me back to my original question as to whether I should cash in my shares when they are low to minimise the amount of tax I pay then re-buy through a stocks and shares ISA? 
When I spoke to someone about cashing out shares when they are low as opposed to high he said that the tax is only relative to the cash value you are withdrawing whether your shares are worth £10k or £20k (that might not make much sense, maths is not my strong point and I struggled to get my head around it at first but think I got there in the end, or did I?). 

MartialArtMan said:

Actually rereading that back I still can’t understand that logic if I cash in my shares at £10k at 40% that will cost me £4K in tax, if I cash in the same amount at £20k it’ll cost me £8k in tax. Where as if I put the £6k into an ISA and it doubles it’ll be worth £12k 😂

Well that answers that question! 

I don't know what tax bracket you are in, but generally you would be paying basic rate tax and NI 20%+12% (32%), or higher rate tax and lower NI of 40% +2% (42%) ; or somewhere in between if part of the profits on the share option took you into the higher rate bracket but the first part had been at a lower rate.  Some companies make the employees pay the employer NI too, which adds up to a greater tax charge but is tax deductible so you can get some funny blended rates. So it's unlikely to work out to exactly 40%.

But for sake of argument we can pretend your income tax and NI was together about 40%...

You mention they told you that gains on the exercise of share options resulted in income tax and NI.  An option is the right to buy a share at a certain price. Say you were granted options for 1000 shares at an option price of £1 per share and you exercise the option when the share price is £10 per share.  So you get £10,000 worth of shares for a cost of only £1000; you will need to pay tax at 40% on the £9000 profit (that's £3600 of tax/ni).  If you exercised the option when the share price was £20 a share, you would end up with £20000 of shares for the £1000 of cost, so would need to pay tax on the £19000 profit (that's £7600 of tax/ni ; more than double the amount of tax).  

So, letting the value creep up before you exercise the option would cost you a bunch of extra tax that would be avoided if you had just 'cashed in' at a £10 share price and invested the £10,000 proceeds inside an ISA and turned it into £20,000 when the share price subsequently doubled, with no more tax to pay.   

Also, in the example above the tax rate on exercising options for a big gain was the same as the tax rate on exercising options for the small gain. But if the amounts get really large before you exercise the option, the marginal tax rate could be higher because making that amount of 'income' in a year pushes you into a higher tax bracket or causes you to lose your personal allowance or child benefit etc due to having a lot of income.

Generally then, if the share price is low in relation to the exercise price of the option, the income tax on exercising the option will be low and you then have the money free and clear to do what you want - either invest the proceeds in that same company, or don't. Whereas if you hold off on exercising the option, the risk is that either (a) there ends up being more income tax to pay for the same eventual value of shares, or (b) the share price drops heavily in value rather than goes up, and so you never bother exercising the option and never get any 'free money' which you could have had.