The opportunity costs of Sharesave
I’ve been at my new job for almost a year now which makes me eligible to join the company’s Sharesave scheme. At my previous company I signed up immediately and began pumping the maximum contribution amount (£250) in each month blindly following the ‘one-way bet’ mentality of most towards Sharesave right up until the share price crashed and the company was de-listed from the market. Granted; I got my 3 years worth of contributions back as a lump sum however that’s all I got. Effectively that £9,000 has just sat there, earning no interest and putting us no closer to moving out of rented housing or early retirement.
The Opportunity Cost
In business and finance; people tend to focus on the costs of doing a single action, whether that be a new purchase or investment for the future. They focus on the costs and rewards that this new purchase might bring whilst ignoring the other potential options which that money could be used for instead. This is the Opportunity Cost; “The loss of potential gain from other alternatives when one alternative is chosen“.
Within early retirement planning, the most obvious opportunity cost that springs to mind would be the costs of not investing. Often (and rightly so) we will hear about the risks associated with shares and so much of the population prefer instead to keep their money in safe savings accounts earning tiny interest amounts. Here the opportunity cost is the potential gains lost while inflation continually chips away at the cash savings. I speak to friends who talk about building up large savings accounts whilst being blissfully unaware of the effects of inflation on this amount and the loss of gains had that money been used elsewhere. such as a mortgage overpayment.
With this in mind, I wanted to consider more deeply the risks and opportunity costs of investing in a Sharesave.
The risks
Access to funds – Unlike a bank account, you can’t dip into the Sharesave funds as and when you might require them. That money is effectively locked away for the 3/5 years in a bet on a single company’s share price rising in that time. Not only are you betting on the share price rising, you’re also betting on not needing that money before the redemption date. Once you sign up, the monthly deductions are set and the pot remains locked away unless you withdrawl the whole lot and forfeit from the scheme.
Golden Handcuffs – You’re only able to realise the gain from the Sharesave scheme if you continue right through to the end of the term. Resigning from your company also removes you from the scheme and your money is paid back without any additions made. Because of this, there will be the temptation to remain with the company for longer than you might normally have wanted to just to get to the end of a Sharesave term. Would you put up with a toxic work environment for 12 months longer just because you’re at 4 out of 5 years on the Sharesave with a large share price increase in that time? Quite possibly.
Opportunity costs – This is potentially a lot of money each month to be putting away for a minimum of 3 years. Could that money be better used elsewhere for more immediate or longer term gains?
What are the alternatives
S&S ISA Investing – Instead of locking that money away in a bet against my company’s future share prince, I could invest it each month in a diversified index fund. Here, the amount would also benefit from Dollar Cost Averaging and compound interest. The investments within the ISA would also be free from Capital Gains tax and a 10% cap on income.
Pension Investing – Upping the amount of AVCs into my pension would benefit from the points above and a decent tax saving. Sharesave deductions are made from Net pay, pension deductions come out of Gross.
Mortgage Overpayments – Making mortgage overpayments which go towards the capital (thus reducing the mortgage term) have an excellent return on money spent towards this. Each £500 currently put towards mortgage overpayments knocks a month off of our term and so saves double that amount back in the long-term.
Cash Savings – Of course I could just stick the money in a normal cash savings account. Current interest rates can beat inflation and it would help build up my emergency cash fund which tends to hover around 3 month’s worth of expenses.
So what should I do?
My company’s Sharesave is offered on terms of 3 years with a 10% discount or 5 years with a 20% discount. Maximum monthly contributions are £500.
Currently my monthly saving allocations are roughly:
S&S ISA – £200
Pension AVC – £200
Mortgage Overpayments – £500
Cash savings – £100-£200
I’d be interested to hear your thoughts. Please leave your comments below or join in the discussion on the forums.
14 thoughts on “The opportunity costs of Sharesave”
I think you are whining to be honest
Effectively you invested £9,000 in a company whose shares turned out to be worthless and then you got all your original money back
That’s pretty much a one off offer from the government
Share prices go up and sometimes they go down to zero and you lose that investment
Would you be complaining about share save if the shares had doubled?
I think you’ve missed the point I was making; not that Sharesave isn’t a good investment on its own.. but that there are other opportunity costs to consider.
Each year when our companies share offers come up we have a good discussion between ourselves, the general consensus tends to be for a low risk option – it’s a no brainer, free money, just do it !!
We have two types of offer, one high risk, the other low risk, to start with I was greedy and went all out into high risk which was buy shares up front at a discount but you can’t sell for at least 5 years – no getting your money back if it goes belly up. After 5 years it dawned that I was over exposed after just taken advantage (I hoped) of a price crash, plus outside of the crash I conceded I didn’t understand price movements, no news events to match changes. That pot has taken 10 years to recover and is doing very nicely now even though two of those years are still running at a loss.
I didn’t do any more share offers for a few years, I hadn’t even looked at the low risk option at this point, was only when someone commented on their return that I looked into it and saw how good a deal it was. You put a smaller stake in (couple percent of salary) but you go into partnership with the bank and they put up the rest, at the end of the term they give you a greater share of any profits (if any) on top of your original stake. With this low risk offer the profits are subject to income tax and national insurance where as the high risk offer falls under capital gains taxation. First couple of years (started pre-crash) I just got original stake back so my loss was the limited interest I could of got if I’d kept it in my bank account, this year I got a 230% return after tax and next year projecting a 500% return, doing well out of recovering from the crash.
My personal mindset on my employers share schemes is I don’t put my own investment pot money into them as I want more control, I have a cash pot for life changing events (buying house, redundancy, having a kid), this is slightly aligned to the special terms available for exercising the share offers early, I was initially using a little bit of this pot but now my returned stake funds my next lot with profits going into my personal investment pot for reinvesting.
The previous commenter did indeed miss the point, in a rather uncivil manner too.
Re Sharesave, I have twice taken the option to put money into my employer’s Sharesave scheme, and got back a reasonable whack when the first one matured, which was a couple of months ago. However, I’ve always been wary for pretty much the reasons you outline – the money is locked away for a longish time, and I won’t necessarily see any gains. I haven’t crunched the numbers but if I’d put the money I invested into the Sharesave scheme into my S&S Isa I suspect I’d have done about as well. So on the whole I think there are probably better options too.
Glad to hear I’m not the only one worrying about it.
I’d definitely go for as much as I could afford. If everything goes to pot, you’ll get your money back, and with inflation at basically zero right now, you’d not lose much from that side of things. But if things go average to well, you’ll come out with a decent profit. You could then use that money to make a lump sum payment to the mortgage, or invest in something else. In the current interest rate environment I’m not making any overpayments, but investing that money instead. It’s growing much faster so it’s giving me a much better return then pouring it towards the mortgage.
Thanks M, good advice.
I thought of the downsides the first time I was offered the chance to invest in sharesave, then watched as the share save soared and my cash got frittered away. Since then I’ve entered four, cashing in two at massive profits and walking away from two as I changed jobs.
If it were me I’d invest the full whack on the grounds that none of your alternatives are a risk-free investment in the stock market and this, effectively, is.
I’ve been guilty in my time of being over-cautious in my investment, but I’d struggle to justify missing a risk-free investment due to an opportunity cost of punting on roughly the same thing with such a high downside risk.
Whatever you do, good luck. As always, the most important and lucrative step is saving it in the first place instead of blowing it on beer, girls and fine dining…
Hi Dan,
Thanks for the advice, I agree that I’m probably over-cautious with my current investing as well, but you make a good point about it being relatively risk-free..
Have to agree with other commenters above, ShareSave is very rare thing and the opportunity costs are minimal IMO when you consider the one way bet part of it. The odds of a single share beating the index fund by a large margin is probably better than we might think (especially taking into account the already 20% discounted price!) and also there is no downside risk apart from losing a teeny amount of money to inflation. Even compared to overpaying the mortgage I don’t think that is a very big opportunity cost. Fair enough overpaying reduces the term but there is nothing to stop you sticking the £9000+ straight onto the mortgage at the end of the 3/5 years and then you get the best of both worlds, or stick it in an ISA or pension. A lot of the time if your company shares have not done well it means the market may not have done well either so you could end up better off just getting your money back compared to index funding it.
As long as you can afford the payments go for it, I think the strategy you mentioned on the forum is the best, £250/£250 on the overpayments and the SS.
I am gutted that our company has just been sold off from our big FTSE100 company to VC’s so there is no longer one available. It worked out in the short term as I could sell the shares early on in the scheme (about 18 months) and as the price has risen that was all good, but longer term now there is no scheme. Boo! :)
Good luck with whatever you decide to do!
Thanks TFS, you make a good point about sticking the cash onto the mortgage at the end anyway if everything tanks, the only thing that would be missed out on is the interest saved had that money been put into the mortgage earlier. I think I will go for the 250-250 approach and then maybe enter next year’s share save with another 250 if things are going well.
I’ve always been investing in my company’s sharesave for 4 reasons.
1. It’s risk free. As an investment newbie, I’m erring on the side of caution, and I wouldn’t know where else to place the funds anyway. I already overpay my mortgage and make AVC’s up to the amount my company matches.
2. It’s taken out of my pay, before I can get my hands on it, and possibly spend it on unwise and impulse purchases.
3. I consider it emergency funds. If I lost my job tomorrow, I’d have this money to live on. Plus, as has been pointed out, I can close one of my schemes early if I needed the money for a smaller emergency (e.g. the car dying).
4. Longer term, I want to see if I can build up enough in there, that I can use that to live on, until I can access my employer pension at 55. This is based on an optimistic timeframe of 10 years. Although I would continue to work reduced hours for 2 years after, so that I’ve got my full NI contributions made (assuming state pensions still exist).
Hello Kelly-anne,
Interesting point about considering it an emergency fund. I guess if you lost your job then it would be well suited for that, but what about if for instance your car broke down but the share price had sky-rocktted and you still had 6 months left before you could get the shares? Would you then take the hit and withdraw from the scheme to release the funds?
Truthfully, I’d see if family or friend’s could lend me the funds, on the promise of paying them back, when the shares matured. Or, if my mortgage overpayment hadn’t gone out yet, and I still had time to stop it, then I’d “borrow” from myself. Closing sharesave early would be next, dropping AVC’S would be the last option. I suppose I could always apply for an interest free on purchases for so many months credit card, or even a loan where you can defer the first few month’s payments, but I’d be really loathe to go down those routes. It would depend on what I’d stand to gain versus the debit interest. It would come down to the maths.