Money: Counting on an impressive share rise

Punters should keep their building society windfalls, writes Dido Sandler

Prepare for a bonanza. Within a few months, members of Halifax, Woolwich, Alliance & Leicester and Northern Rock stand to receive up to pounds 20bn of free shares.

On Monday, members of Halifax are expected to rubber stamp the society's conversion into a bank, triggering average pay-outs of pounds 1,200 in shares to 8 million members. Almost 2.5 million Woolwich members have already voted in favour of flotation, as have Alliance & Leicester savers and borrowers. Nor are the handouts confined to building societies. Norwich Union, the life insurer, will hand out around pounds 2bn of shares by the summer. Scottish Amicable is presently the subject of a takeover battle in which rival bidders Prudential and Abbey National are offering to pay for the company in part with their own shares.

Members turned shareholders will have to decide whether to cash in their shares and blow the money, or keep them. For those looking forward to a new kitchen or a holiday, the ex-mutuals will in most cases provide a free-dealing service for a limited period. For those tempted by the promise of cash now, that is the best option.

But Rob Thomas, industry analyst at UBS, the Swiss banking group, says punters stand to make impressive gains if they stick with their shares. Profit margins are set to improve as housing transactions increase, cut- throat fixed-rate and discount mortgages tail off and bad debts reduce.

There is a healthy precedent for growth with former building society stocks. Abbey National shares floated at 130p in 1989, and now trade at around 780p. Shares in Norwich Union are also expected to appreciate.

Individuals who stick with their shares should decide on their most tax-efficient home. If you are a taxpayer and receive one large payout, it may be worth wrapping your shares in a personal equity plan (PEP), to protect them from both income and capital gains tax (CGT). Under normal circumstances, a self-select PEP might be an option. This is where you pay a fee to the PEP manager who provides the wrapper for a "pick your own" selection of shares.

But if you receive just pounds 800 to pounds 1,000 worth of shares, annual charges on a self-select PEP of between pounds 15 and pounds 30 may prove too expensive compared to the income (about pounds 30-pounds 40 at first) and capital gains, especially for taxpayers at lower marginal rates. Again, all societies plan to offer cheap PEP wrappers, most likely with far lower charges. You can also use your pounds 3,000 single-company PEP allocation to shelter shares, no matter how many and how much they are initially worth.

However, if you receive multiple share payouts, self-select PEPs may be the right option after all. It may also make sense to bundle shares in with other equity holdings in a mixed-style PEP likely to be offered by a number of fund managers if you are close to your pounds 6,000 general PEP allowance.

An M&G spokeswoman explains: "If you already hold a general PEP which cannot accept individual shares, you will lose the opportunity to PEP any other bonus shares that come from the demutualisations. Some company PEPs allow their own funds to be used alongside the shares, making full use of your entitlement."

Companies offering this service so far include Perpetual and M&G, although others are expected to join them. They will impose limited or no charges for adding these shares to PEPs, in the hope that you will sell your shares to them at a later stage.

For self-select PEP advice: Dealwise 0113-244 4095; Hargreaves Lansdown 0900 850661; Killik & Co 0171-461 4500; M&G 0990 850661; Perpetual 01491 417000; Sharelink 0121-200 2242.

The Independent has published a Guide to PEPs, sponsored by GA Life, a leading insurance company. For your free copy, call 0500 125888 or fill in the coupon (left).

Dido Sandler works for Financial Adviser.