How to increase your net worth using SIP and SAYE schemes

Your pension can be supplemented by employer-sponsored savings or share-incentive programs like SIP and SAYE schemes

Aside from the obvious options like private pensions and individual savings accounts (ISAs), are you looking for new ways to save for the medium to long term? If you work for one of the more than 1,000 UK employers that offer an employee share scheme, it might make sense to join. In order to maximize tax efficiency, these programswhich must be targeted at all employees, not just top executivescan even be combined with ISAs.

Here, there are two choices. Sharesave, also known as a save-as-you-earn (SAYE) plan, is the most basic scheme. You deposit up to £500 per month into the designated savings account of the scheme for a period of three to five years. The funds typically accrue a fixed rate of interest, and certain schemes provide a tax-free bonus at the conclusion of the plan. At this point, you can use your savings to purchase employer stock at a predetermined price. Up to 20% of the share price at the beginning of the plan may be deducted from this price.

With SAYE schemes, there is little risk.

If, when you're ready to buy, the price of your employer's shares is higher than this "strike price," you're sitting on an instant windfall. You can use your savings to purchase the shares and then sell them for a quick profit, or you can wait for more gains. You can also ask for your money back if your employer's shares have decreased since the scheme started, making the strike price appear high.

SAYE schemes are therefore essentially risk-free. Although there is no chance that your cash savings will decrease in nominal value, they may lose real value if you are unable to cash them in at a profit if inflation exceeds your interest income. You typically receive your money back in full if you quit your job before the plan matures.

Plans with shares as incentives (SIPs).

Some employers prefer the alternative, which is a share-incentive plan (SIP). You can invest up to £1,800 annually in employer shares through a SIP, with the funds deducted from your paycheck before income tax and national insurance are subtracted. This effectively provides tax relief on your investment, but you must hold the shares for at least five years to maintain this benefit. You can sell after five years; only gains made after that time period are included in the calculation for capital gains tax, though profits may be subject to it. The specifics of your SIP will be determined by your employer. According to your contribution, some companies give you free matching shares; they can give you stock worth up to £3,600 annually. You can use the dividends paid on the shares you purchased to fund additional investments through some companies' dividend reinvestment plans. A SIP carries a higher risk. You're making an investment in stocks that could rise or fall. However, this risk is somewhat mitigated by the upfront tax benefits, and it will also matter if you are eligible for free matching shares.

SAYE plans, ISAs, and SIPs.

Lastly, don't discount the possibility of utilizing ISAs in conjunction with these plans. You have ninety days from the end of the scheme period to move your shares into an ISA with both SAYE plans and SIPs. This will guarantee that any future income and profits are tax-sheltered. However, the transfer's value does count toward your 20,000 ISA allowance in the year that the investments are moved.

With employee share plans, one final thing to think about is whether you run the risk of becoming overly reliant on your employer, depending on it for both your income and the growth of your investments. Diversifying your investment portfolio with other holdings will undoubtedly help.