Having started this blog by looking at how to make yourself a millionaire whilst working at Phoenix, we thought that we would start getting into the basics of how to do this one step at a time. We picked the Phoenix ShareSave Scheme first, as it is the least risky for you as an investor. At its simplest this workplace scheme is a way to benefit from the growth in the company’s shares whilst having the back-up of cash if the price falls. It is the kind of investment that general investors would love to have.
Pros:
- You benefit from the growth in the PGL share price over 3 or 5 years.
- The initial price is discounted by 20% and Phoenix bears that cost.
- If the price falls below the initial price you have the option of cash.
- You can save anywhere between £5 per month and £500 per month so it affordable for all.
Cons:
- You have to pay Capital Gains Tax (currently only 10% or 20%) if you make enough profit.
- Contributions come from taxed income unlike other savings schemes.
- If you opt for the cash option you may have less than if you had saved into a savings account in the same period.
Detail:
The Sharesave scheme allows you to invest monthly into Phoenix Group plc shares, from between £5 to £500 per month from your post-tax salary. Rather than buying the shares there and then each month, the scheme provides an option to purchase the shares after 3 or 5 years depending on the scheme you choose to invest in. The option price is set when you join the scheme, and is set at a 20% discount to the market value of the shares at this time. As you have the option to purchase shares at the end of the scheme, should the share price of Phoenix Group plc have fallen below the option price, you are able to have the money you have put into the scheme returned to you. If the share price is greater than the option price, you can purchase the shares for an immediate profit. The scheme therefore carries very low investment risk as you will at the very least get the value of your contributions returned to you.
You can only join the scheme once per year (you will be e-mailed in mid-March) and you can join as many schemes as you like, so long as your monthly contribution is not above £500 in total across multiple schemes. Once you have joined the scheme you are not able to change the monthly amount invested into the scheme, so make sure the amount you choose to invest on a monthly basis is sustainable for you over the next 3 or 5 years. You are free to leave the scheme and have your cash returned to you at any time, but withdrawing from the plan will mean you forfeit the right to buy shares at the option price and you will not be able to rejoin the scheme until the next offering. You are able to take a payment holiday of up to 12 months without forfeiting your options but you must complete the full term of either 3 or 5 years when you restart contributions.
The scheme does not have any income tax or national insurance implications. However, if the share price is above the option price and you choose to exercise your option and buy the shares at the end of the scheme, you may be subject to capital gains tax when you come to sell the shares. You are entitled to £6,000 of tax-free capital gains in the current tax year (falling to £3,000 next tax year) with any gains above this taxed at 10% or 20% depending on whether you are a basic or higher rate tax payer. For example, if you had invested £100 per month over 5 years (60 months), you would have invested £6,000 in total. If you had the option to buy shares at £10, you would purchase 600 shares (£6,000 / 10). If the shares had increased in value over that time and the market value was £20 a share, those 600 shares would be worth £12,000. You could sell those for a gain of £6,000 and not have to pay capital gains tax. If the shares were valued above £20 per share, there would be capital gains tax to pay. It is important to remember that it is better to pay a little bit of capital gains tax on investment growth than to have no investment growth and therefore no tax to pay at all!