A Splendid Savings Scheme

Imagine a savings plan which more than triples your money by buying shares with government help. The good news is that it already exists!

As I reported last Thursday, the Bank of England cut its base rate from 1.5% to 1%, which is the lowest rate in the Bank's 315-year history. In early October, base rate was 5%, so it's fallen by four percentage points in four months.

The plunging base rate means that British savers are now earning some of the lowest rates of interest in modern history. Indeed, a typical savings account now offers an average interest rate of slightly over 1% a year. This is grim news for pensioners and other people who rely on savings to supplement their income.

Shares look increasingly attractive

By and large, savings accounts are safe, secure and straightforward, whereas investing in shares is always something of a rollercoaster. Indeed, the FTSE 100 index, which tracks the value of the UK's one hundred largest listed firms, fell by more than three-tenths (30%) in 2008. Ouch!

Nevertheless, given the poor returns on offer from savings accounts, the stock market is starting to look increasingly attractive. Personally, I've been buying what I view as some terrific bargains. Today, close to 100% of my personal wealth is invested in companies which I expect to do well in the years to come.

Still, wouldn't it be great if you could tip the investment odds in your favour so far that investing in shares becomes a complete no-brainer? The good news is that you can, but only if you work for an organisation which allows you to participate in employee share schemes. Alas, this means that only private-sector, not public-sector, workers can take part in this particular game.

Share incentive plans (SIPs)

A share incentive plan, or SIP, pretty much does what it says on the tin: it acts a carrot to encourage employees to work harder and stay with a firm for longer. In other words, it provides additional financial benefits to workers by enabling them to buy discounted or attractively priced company shares.

Let me give you a practical example of how one SIP works. My wife recently asked me to take a look at her latest SIP statement to see how her company's share incentive plan was performing. Since her SIP began in 2001, her company's share price has dropped almost every year, so my better half wondered whether she should continue to contribute to this scheme.

Buy one share, get one free

Under the terms of her SIP, Mrs D'Arcy can buy up to £125 of shares each month, for a total contribution of £1,500 a year. The twist is that this sum is deducted from her pre-tax pay. In effect, this means that she avoids paying income tax and National Insurance contributions (NICs) on this sum. In other words, her payment of £125 a month costs her just £73.75 a month, after accounting for 40% tax and 1% NICs.

So, Mrs D buys £1,500 of shares each year, but forks out only £885, for a yearly gain of £615 (all else being equal). However, the fun doesn't stop there, because her employer's SIP generously allows her to BOGOF: buy one, get one free. Therefore, she receives shares to the value of £3,000 a year, but these cost a mere £885. In effect, my other half enjoys a 239% return on her money on day one, which is a remarkable return.

Of course, over time, her company's share price goes up and down, which means that there is still a risk that my wife could lose money by investing in her SIP scheme. However, on checking her most recent SIP statement, I found that she has contributed for eight years. In this period, she has paid in more than £7,000, plus tax relief of £5,000, paying £12,000 for her shares.

In addition, my missus has boosted her returns by reinvesting her dividends (the income paid by her shares) into buying yet more shares. This increases the size of her shareholding and enables her to buy more and more shares over time. The great news is that my wife's SIP is worth almost £24,000 -- and her handsome profit is tax free if she obeys the rules regarding share withdrawals.

So, while many companies' share prices are in the doldrums and other investments look unattractive, now could an excellent time to invest in your employer's shares. However, don't go overboard and end up with all of your eggs in one basket. Some workers at Marconi and Network Rail lost everything when their employer failed, so make sure that you don't rely solely on the shares of a single company!

For more information on SIPs and other employee share schemes, read Your Boss Could Make You A Millionaire, Ten Ways To Win With Shares and the ifs ProShare guide to SIPs.

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