Employee sharesave schemes used to be a passport to juicy profits. In the bull markets of the 1990s, and again from 2003 to 2007, workers cashing in their share options could count on making large gains in save-as-you-earn (SAYE) schemes. They would spend their nest eggs on anything from private school fees to home extensions.

Since the UK stock market turned downwards in the summer of 2007, sharesave schemes have ceased to be a one-way ticket to riches. This has been reflected in a fall in the number of people subscribing to the schemes. Last October ifsProShare, the body promoting employee share ownership, reported that there were more than 2.3 million sharesave accounts. Today this has fallen to 1.6 million.

However, many financial experts believe that investors should not be too hasty to dismiss SAYE schemes because they offer a unique no-lose investment opportunity. At the end of a scheme’s term, savers receive a tax-free bonus. They then have six months to decide whether to use the bonus to buy shares at a discounted rate, which is fixed at the start of the contract — the option price.

This has not worked in the favour of investors whose schemes have matured recently. The share prices of many companies operating the schemes have fallen below the relevant option price, making the options worthless.

However, supporters of the schemes point out that those who choose not to convert their regular savings into shares can simply walk away with the accumulated tax-free cash sum.

Moreover, Julie Richardson, of ifsProShare, says that, for those with strong nerves, now is potentially a good time to start a fresh sharesave contract. With the UK stock market well below its peak, those opening SAYE plans today will secure low, and therefore much more attractive, option prices.

More than 800 companies operate SAYE plans, which are designed to be open to all employees in a particular company, from the boardroom to the shop floor. Staff members who participate agree to make regular monthly contributions of between £5 and £250 for a period of three or five years. Those saving for five years can opt to allow their savings to remain in the account for a further two years. They can take out only one scheme a year but can have more than one scheme running at a time, provided that their total monthly contribution does not exceed £250.

At the end of the set term, employees have the option of using their savings to buy shares in the company at a previously agreed price, which is normally 20 per cent below the share price prevailing at the start of the scheme. Any profit obtained from acquiring company shares through the scheme and then selling them at a higher price is potentially liable for capital gains tax (CGT). However, since each individual can make an annual profit of £10,100 before CGT bites, this is likely to apply only to people whose company share price has gone up very sharply.

Investors can also transfer shares acquired through SAYE schemes to the CGT-free shelter of an individual savings account (Isa). This must be done within 90 days of acquiring the shares and investors must keep within the annual Isa limit, currently £7,200 but due to rise to £10,200 within the next six months.

Alternatively, if exercising the share option would not produce a worthwhile profit, they may choose to withdraw their money when the scheme matures and pocket the tax-free bonus that is added to their savings.

The bonus is the equivalent of annual interest and is set out as a multiple of the regular monthly savings. At the moment the tax-free bonus on a three-year scheme is 0.3 times the monthly contribution, an effective annual interest rate of 0.54 per cent. This is worth 0.67 per cent to basic-rate taxpayers and 0.9 per cent to higher-rate taxpayers.

On a five-year scheme the bonus is 2.2 times the monthly contribution, the equivalent of an interest rate of 1.42 per cent (1.77 per cent to basic-rate taxpayers and 2.36 per cent for higher-rate taxpayers) The seven-year scheme offers a bonus of 5.2 times monthly contributions, making an effective rate of 1.84 per cent, or 2.3 per cent for basic-rate taxpayers and 3 per cent for those on the higher tax rate.

Some experts have pointed out that these interest rates, which have been lowered in recent months, are not competitive when compared with ordinary deposit accounts. Savers can obtain rates of more than 4.5 per cent from three-year fixed-rate savings accounts or more than 5 per cent on five-year accounts.

However, Geoffrey Bond, a director of RM2, the employee benefits consultancy, insists that sharesave schemes still have a lot going for them. He says: “In the first place they encourage thrift and regular saving, which is always a valuable thing. Secondly, the money saved builds up tax-free. Thirdly, most people who take out sharesave schemes will be able to convert their savings into shares at a profit, especially since they are obtaining a valuable 20 per cent discount on their option price.

“Some people appear to have been scared off by the recent fall in the stock market, but I think that is a pity. I would say that there is never a bad time to invest in sharesave schemes because of the many incentives that they offer. Today’s comparatively low market levels offer a chance to secure options at cheap prices.”

Case study: A worthwhile stake in Tesco

James Wiggam (pictured, top) did not take long to decide that he liked the idea of sharesave schemes. The 28-year-old joined Tesco’s graduate trainee scheme four years ago and 12 months later, as soon as he was eligible, he was making his first contributions into its save-as-you-earn scheme.

Mr Wiggam, who now works as a corporate affairs manager at Tesco’s Cheshunt HQ, says: “I have opened a sharesave scheme each year for the past three years. I put £50 a month in each one, which makes a total of £150 a month. Each scheme runs for five years, so my first one still has about two years to run. I plan to invest in a fresh scheme each year and when the first scheme matures I will invest in another one.”

He adds: “I like the idea of buying shares at a discounted price and think it makes sense to have a financial stake in the company. The payouts can be considerable. This year staff received a total of £126 million in payouts on maturing schemes. It’s a tremendous incentive.”