Make Your M&S Shares Work For You - Ask the Experts!

H: Murray Norton, host

A: Anne Govier, M&S

AP: Alan Page, Killik

H: Hello and welcome to this show, specially designed to help you make your M&S shares work for you. Now, many of you have waited nearly 3 years for your deferred share bonus plan shares that will be released next year, whilst others of you might have to wait a little longer. In either case, we're sure you'll want to make the most and make the right decision, when you receive them, and it's important to start planning now. So in order to help you make the most of this investment opportunity, and explain the financial planning issues that matter to you, I'm joined by Anne Govier from M&S, and Alan Page from Killik, Anne, Alan thank you very much indeed for joining us, good to have you -

A: Thank you

AP: Thank you

H: Thank you. And in order that we get through as many of your questions as possible, thank you very much indeed for sending them over the last couple of weeks. We'll get through as many as we can as soon as we can. Let's first of all start by talking about the M&S share scheme, and whose it for and how do they qualify? Anne?

A: It's the deferred share bonus plan, and it's an award that we make to the top 400 as part of their annual bonus, part of their bonus is deferred into shares, which they then keep for 3 years, and are released after 3 years, and this is what we want to talk about, the investment opportunity at the end of that 3 years

H: Now as I said in the intro, some of them have been waiting 3 years for these, and they're released next year

A: Yes

H: And some will wait a little bit longer

A: They will

H: And some yet haven't got those shares -

A: That's right, yes and some people may not yet have had an award but it is something they'll have in the future, and like all these things, the more you plan the better you get

H: Ok that sets it up for us so that we know who gets them. How can - we've got questions coming in, lots of questions, so thank you for those - how can the tax and national insurance be paid? What are my choices?" was one of the questions we had in earlier

A: Well I suppose the first thing is to say that unfortunately you do have to pay tax and national insurance on these shares, because when you received the bonus the tax was never paid at that time, but the good thing is there are choices as to how we can settle the tax and national insurance - there are 3 ways. The first way is to sell all the shares, and then the tax and national insurance will be withheld from that sale and you get the net proceeds. The second is you can just sell sufficient shares to cover the tax and national insurance, and then the remaining shares are yours to keep; and lastly, you can keep all the shares and you have to write a cheque for those tax and national insurance liabilities

H: As we can see up here, this gives us an idea of it

A: Yes

H: Just take us through this

A: I mean hopefully this is quite a good example. The tax and national insurance is 41% and there's nothing that we can do about that, unless Gordon changes it between now and next year

H: That's 40% -

A: 40% tax and -

H: 1% national insurance?

A: Spot on. So you can see that if you wanted to settle it in shares, you would have to settle 2000 shares in this example to pay the tax. 50 shares from the national insurance, and you'd be left with 2,950 shares out of the 5000 that you received. Alternatively you could settle it by paying cash, so 6,000 plus 150 national insurance, so the net impact - you'd get £8,850 worth of shares.

H: So there are options

A: Yes

H: People can do it,

A: Exactly

H: But the one option that you haven't got is, you're not going to get away with it, you're going to have to pay some tax

A: Unfortunately unless you pay the tax you don't get the shares

H: That's exactly what it's about

A: Yes

H: What about the dividends on the shares?

A: Probably the good thing is to remind people that over the last couple of years, while the shares have been held in trust, the dividends that the shares would have earned had been all been wrapped up, so when it finally gets to the end of the three years, there will be a cash payment, and that will go through their salary. Now if they do want to see what that amount is, if they go onto the Killik senior share scheme website, bit of a mouthful, that will show them exactly - what the dividends are so far to date. I think hopefully most people would be pleasantly surprised at how much that is

H: You mentioned pleasantly surprised - I think with dividends, people tend to forget the dividends and it comes up when they least expect it

A: Spot on, so again start planning now for how you want to use those dividends

H: Well we know we've got to pay tax, but what about reducing the tax that we pay - how do we go about that?

AP: Well there aren't too many ways of reducing tax unfortunately. One classic way is by making a contribution to your pension scheme, however pensions are long term and you won't be able to access that money till you're aged 55, unless you're aged 50 before 2010

A: Yes Alan's right, pensions are for long term, but it is a good way of claiming back the tax and national insurance, so perhaps an example would really help people understand. So in this example the value of the shares is 10,000, and then the net value after all the taxes have been paid is £5,900. Now, by putting that into a self invested pension plan, or a SIPP as they're abbreviated, that is automatically uplifted by the basic rate of tax which is 20%, then at the end of the year the additional tax, the high rate tax payer can be reclaimed, so that's another £2000 so in effect what you're getting is a pension contribution of £9,900. The only bit you can't claim back is the national insurance which is the £100

H: That's income tax. Let's talk about something which is separate and is often confused between the two, and that's capital gains tax.

AP: It's rather like a two stage race. And basically stage one, just before you hand over the baton, would be income tax, and then stage 2 is where we come into capital gains tax

H: What is the rate of capital gains tax?

A: Well Murray the rate is 18% and that's a flat rate. But it's important to remember that you're only going to pay that if you keep the shares, after they've been released to you. Any gain, as I said is subject to 18% tax, there are other things which are subject to capital gains tax, your second property - if you own it - if you have fabulous works of art or jewellery. There are things which are exempt from capital gains tax, so your main property, should you sell that won't be liable. If you put shares into ISAs, or if you hold National Savings

H: That's what you're going to have to pay, just explain how that works in this share scheme

AP: Ok. With any asset that's chargeable to capital gains, you have a base cost, and basically you pay capital gains tax on the profit element and the base costs to the value of that asset when you sell it. If we're talking about shares, then we have this arrangement called pooling, so if you're buying shares in the same company like Marks and Spencer, or you're acquiring shares, then the Inland Revenue deem them all to be of the same, so let's take an example; suppose you acquire one share at £12, and then a little bit later you buy another share at £10, then subsequently a further share at say £14, what happens is that you actually divide the total cost by the number of shares, so in this example we're dividing £36 by 3, and that will give you the average cost of the shares, and that's the base cost of which you pay capital gains tax, or capital gains tax is tax -

H: So it doesn't matter which price you buy those shares, collectively it's divided?

AP: They're all the same, absolutely correct

H: That makes a little bit more sense on pooling - certainly in capital gains tax. Is there anything else we need to cover on this, that more or less covers it?

A: Well it's probably just worth pointing out that pooling is a self-calculation so you are going to have to do that yourself. But the good news is there are ways of reducing your CGT liability. The first one is to make use of that annual allowance, so as Alan said £9,600 is the allowance for this year. You can transfer the shares to your spouse or your civil partner, which means when you come to sell them you've got double the allowance for yourself and your partner. You can sell the shares and put them into an ISA and then that goes into an effective tax wrapper which means they are free of CGT liability. As we said previously you can transfer them into a pension scheme, and the other thing is also to straddle two tax years, so sell some one tax year, sell them the other and again you're getting double the allowance

H: Let's talk a little bit about investment, and investment planning particularly which is what we're here to talk about really. You get these shares, you've got to start investing for the future with them. Can these shares, and this is another question that we've had sent in to us previously, can these shares be held until it's a better time to sell without any losses? Do I need to do anything or do they just get added to my share holding?

AP: Well I think that they're added to your share holding if we're talking about these particular shares then you will have a nominee account which they're simply added to, so you don't have to do anything, they're looked after safely on your behalf until you think it's a better time to sell them. Of course, you know you are then in the marketplace and they may go up or down in value

H: Question that did come in - if I keep my shares, what happens when I sell them?"

A: What will happen is if we remember our example on pooling, you'll have a value for each of the shares. When you come to sell, some of all of the shares, then the profit element, which is the capital gain, will be calculated, and if it's then above the annual exemption limit, which is currently £9,600, you will pay tax at 18% on the amount above that figure

H: Right. As I said we've had plenty of questions sent in to us previously and one of them here, and this is typical of quite a few of the questions - am I right in assuming that with the share price at £2.44-ish there is little point in selling any shares and therefore doing anything?"

AP: It depends on whether you need the money now, but certainly when we're talking about a good share, a good company, what you're investing in is the profitability, the long term growth of that company, so if you don't need the money now then there's absolutely no reason to sell them, you can wait until the markets sort themselves out and make a better profit on that share.

H: This is - this should be treated - open question to both of you, but very much almost as a windfall isn't it, and people, when they get that, are very often quite nervous as to what to do - to do the right thing because it's something that they probably didn't think about

A: I think it's a really good question, I think - this is the first time that this sort of share plan has come to maturity so it is quite a different decision that people are having to make, and I think it's probably thinking not only for today but also future long term, and I know Alan was saying, you know is it do you need the money now, or should you be planning for your future 5 years, 10 years and I think probably Alan would say that there are different decisions and your money could be put in different places and I think people might be interested in, you know, what those might be

AP: It's horses for courses, it's what your circumstances are at the present time and what your objectives are. I think there's a number of things we need to consider in terms of investment, and that's investment risk, it's where we have our investments we probably don't want all our eggs in one basket, so basically the other thing would be of course time frame, you know how long can we put this money away? Do we need it -

H: At what stage of life you're at?

AP: Yes, it very much depends on what one wants to achieve. And I suppose really you need to put a bit of money away for the shorter term, bit for the longer term and hopefully a bit for things that might come up in between time

H: I suppose the one thing is, depending on where people are in their lives at that time, it could be they want to reduce their mortgage, or any debts that they've got outstanding

AP: Oh absolutely Murray, it's a very, very important consideration for people, especially in today's climate. It's - quite often the best investment strategy is actually to reduce your debt. If you think about it, the cost of your mortgage is always going to be given similar rates of interest, higher than the return you're going to get after tax from your building society or bank deposits. So from that point of view, the cost of borrowing is normally much higher, it makes sense to reduce your mortgage

H: So that's a case of reducing the amount that you have on your mortgage, that's one way of dealing with it?

AP: Yes

H: What else have we got in terms of looking at this?

AP: As the graphic shows, one thing is to reduce your mortgage. If you're a little uncertain as to what's going to happen with rates, or more importantly you would like a degree of certainty, then it makes sense to consider fixing a mortgage, so at least you know what your outgoings are over the next 1, 2, 3 or 4 years. Another consideration in paying down the mortgage is that that's ok if that's your only debt, but a lot of us, unfortunately, have credit card debt. The costs of borrowing on credit cards are much higher than normally the mortgage, and therefore it makes sense to pay off your credit cards first

H: That becomes the priority debt then?

AP: Absolutely. Finally I think we mustn't get away from the fact that we all need a rainy day fund. One way that you can keep some liquidity but reduce your outgoings as far as your mortgage is concerned, is to consider what is called an off-set mortgage, and basically that's simply an account that runs alongside your mortgage, and you don't get any interest on it, but you don't pay any mortgage interest, so if you've got a £50,000 mortgage and you're lucky enough to have £25,000 in the bank, then you're off-set will reduce the interest that you're paying down to £25,000

A: That's right Alan, examples that people might have heard of are Virgin One Account, First Direct. There are lots of them around so it is a good way of reducing people's debt

H: So that's a way of almost silently reducing that debt

AP: Absolutely and of course you can access that money at any time

H: Ok. Well that gives people plenty to think about with probably the biggest debt that they have which is their mortgage

AP: Yes

H: You talked earlier on about putting all your eggs in one basket, what do you mean by that?

AP: Well that's very important, it doesn't matter what asset you've got, whether it's a share or another asset, you've always got a certain amount of risk associated with that particular asset, so by spreading that risk among a number of different assets, a number of different shares, then you are reducing it, i.e. not putting all your eggs in one basket

H: Right. In terms of - and I think it's fair to say - it's a question again to both of you that for a lot of people receiving these shares, and we mentioned before it's a windfall, this may well be the first time shares have been given to them in this type of way

A: Yes

H: People have gone out and bought maybe publicly-owned company shares before, but this is the way that they're coming in as part of their salary, so this is something new for a lot of people isn't it?

A: It is, and I think that's why we wanted to talk to the individuals now, to say yes, this is great, you are getting something, and you know, you want to make the most of those shares, you know make them work for you, so you know this is hopefully trying to get the old brain juices going, and to start thinking now and forward planning as we said for how you want to use that windfall. You know, do you actually just want to squander it and buy a fast car, or do you actually want to plan for the next 10 years and you know they are very different decisions.

H: Lot of great options down there but obviously people will want further information as their interest grows on this, particularly as this first tranche of shares gets delivered, so where can people go for further information?

A: I think the first thing is, this is a taster, we obviously can't in this broadcast cover absolutely every eventuality of you know what you should do now, next year, the year after. It maybe they want to seek further financial advice from an independent financial advisor, and there are different sites that you can go to to seek out one. There probably are some golden rules about financial advisors -

H: Such as?

A: Such as, I'm probably going to say to Alan -

AP: I think basically if you're going to see an advisor, a professional, then you need to know what it's going to cost you, and you want to know, you know what the fees are or what the hidden fees are in terms of commissions, and you want to know that upfront. I think you probably need to shop around, find somebody you feel comfortable with, and most certainly you need any advice in writing

H: Now obviously there is a lot to take in, there's a great deal of information in a short space of time - where can people find out more information at their leisure?

A: What we have done is we've made a PDF of all the slides that we've used today and some more, where things we might have just talked about, and in that PDF is a list of all the websites that we've referred to, so people can either email their questions, as Alan said, or go to the website and find out more information, so hopefully we're making it as easy as possible for everyone

AP: Absolutely. The more questions the better

H: Good luck to you both with the questions you're about to get, thank you very much indeed Anne and Alan for joining us

A: Great

AP: It's a pleasure

H: And thank you very much indeed for joining us, and enjoy those shares!