0% interest rate hits work saving schemes
Fewer than two out of five employees take up workplace share schemes, even with a 20 per cent discount
Interest on savings schemes aimed at encouraging workers to buy shares in their company have been cut to zero.
The move dramatically reduces the attractiveness of Save As You Earn schemes – set up by the Tory government in 1980 to encourage share ownership.
Until now, the schemes – offered by the likes of BT, Aviva and Asda – have been a no-risk way for employees to buy into the success of the company they work for. It allowed them to buy shares, or get a decent return on their savings.
Under SAYE workers are offered options to buy a company's shares at up to a 20 per cent discount on the prevailing price. They then pay a fixed amount each month – up to £250 – into the savings scheme for three, five or seven years.
At the end of the term they can take up the option to buy the shares at the original price, which would hopefully, be much lower than the current price at that point.
But if the share price has fallen, workers can simply cash in their savings, plus interest at a competitive rate.
Just four years ago that was 4.36 per cent on five-year schemes, with similar rates on other periods. But, after interest rates fell generally, the rate on three- and five-year schemes was cut to zero a year ago and on seven-year schemes last month.
That means anyone locking their money away for seven years now will get no interest on their cash if they don't take up the share options. Compare that with someone who chose to pay £250 a month into a scheme four years ago, who can expect to get about £900 of interest. Without the fall-back of the interest pay-out, SAYE schemes are much less attractive.
Roy Maugham, a tax partner at UHY Hacker Young, said: "The Government is supposed to be encouraging employee share ownership, not penalising people with such low interest rates that their SAYE schemes could actually lose value as inflation eats away at their savings."
Some two million workers took up SAYE schemes last year, according to ifs ProShare, but that worked out at only 37 per cent of eligible staff.
However, people should not be put off by the current zero interest rate, said John Collison, the head of ifs ProShare. "The interest rate is only part of the picture. The big issue is the discount companies offer on the share price – of up to 20 per cent. The schemes are a risk-free way to buy shares in your firm."
The formula to work out interest is based on swap rates. "That could go up again in the future, adding interest back to schemes," said Mr Collison.
But is he right that SAYE is attractive even without the interest? If you can buy shares at less than their current value, then as long as they fall no more than the discount you paid, you'll have made money. Even if they fall further, you still get a full refund of your payments.
"You could, of course, put your money in a high street savings account and get some, albeit paltry, interest," Mr Collison said. "But you would miss out on sharing in the potential growth of the firm you work for."
Mr Maugham called on the Government to rethink interest on the schemes to make them more attractive. "Although HMRC is told how to set the interest rates on these schemes by a government-set formula, there is no reason why it cannot change the formula to give savers a sensible deal," he said.
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