Build your nest egg of shares with the concept of an employee share scheme.
When I first started working at a bank there was a scheme available for employees to purchase shares at a discounted price. Now I am a complete newb when it comes to shares but on advice of my partner I participated in the scheme on and off through my 3 years of employment, and now have $6000 worth.
What is an employee share scheme?
Many companies offer their employees a chance to purchase shares in the company they work for. Usually they are discounted from the market price, often you do not have to pay any brokerage fees and it is commonly done through pre-tax earnings. For example with scheme my employer had you could nominate up to 10% of your pay to purchase shares at a 5% discount which was taken out before tax, thus reducing my taxable income amount.
What are the features of an employee share scheme?
A scheme a company uses can be simple or complex so it is important to understand all the variables involved. Factors involved may include the price that the shares can be purchased at. So for instance in my case the shares were purchased on a set date every quarter and the cost to me was shared among my pay throughout that quarter. You may also be restricted in the time of employment and eligibility to purchase shares (commonly around 1 year of service). There may also be restrictions in the amount of time you need to wait before you can sell your shares and in some cases you may need to reach a certain performance target before being able to purchase.
Why does your company have an employee share scheme?
Commonly employers have a scheme to attract, retain and motivate their staff. Many studies have shown that it can increase productivity as employees then have a vested interest in improving the company’s profits. You may find that companies also provide share plans as part of an annual review (where they give a lump sum of shares after each financial year).
Should you participate in the employee share scheme?
It is important to find out what kind of tax implications participating may incur. You also need to look at whether you have enough income to cover the costs of the purchase-make sure that if you do participate, that you can withdraw at any time if you are finding it too hard with your finances. You should also consider the strength of the company and whether it is likely for the shares to increase in price or at least remain strong. A study conducted by Melbourne University showed that 74% of employees viewed the schemes as a way to save and 78% saw it as an easy way to build a nest egg.
Other things to consider
Employee share schemes can be a great way to build up your share portfolio but like anything make sure you get advice on any tax obligations you may face. It is also wise to think about it as a long term investment, but consider what you would do with the shares once they are moved into your name.
You may be saving it for something specific like your children’s education or you may consider putting into your super for you retirement savings. If you want to keep growing them you may also think about a dividend reinvestment plan to continue growing your portfolio.