Standard Life - Q & A

By Naomi Caine

Get ready for a windfall! Standard Life, the insurance company, will hand out free shares worth on average £1,700 when it floats on the stock market in July. Read our Q & A about the Standard Life flotation.

Why does Standard Life want to float?

The company is currently a mutual, not a plc. It is owned by policyholders rather than shareholders, which makes it tricky to raise money to expand the business. If it floats, it will be able to tap more easily into the equity market if it needs funds. A number of companies have already shed their mutual status, including Halifax and Scottish Widows. Standard Life is a recent convert to the cause: it successfully fought off an attempt to force a flotation in 2000.

Does everyone qualify for a windfall?

Standard Life reckons that 2.4m of its 4.3m policyholders will get a windfall. You must have a with-profits policy that was set up before March 30 2004 and which is still in force at the end of May. The company also hopes to give free shares to people whose policies matured between October 18 2005 and May 31 2006. If you live overseas, you will probably get the windfall in cash, not shares.

What's a with-profits policy?

It's a long-term investment plan that aims to “smooth” returns by paying out annual bonuses. The bonuses do not necessarily reflect the performance of the underlying fund because the company holds back profits from the good years to bump up the payouts in leaner times. A fund might, for example, generate returns of 10% one year and 2% the next. But the with-profits policy could pay out 5% each year. With-profits policies were popular in the 1980s - many are linked to mortgages as endowments. But they have since fallen out of favour, mainly because of poor performance, lack of transparency and high charges.

How much will I get?

You will get a fixed allocation of at least 185 shares. Most people will then get additional shares depending on the type of policy, when it was taken out and how much has been invested. You will find details of your share allocation in the paperwork which is being sent out by the company.

The firm's advisers expect the shares to be worth between 240p and 290p if the float goes ahead. If you take the mid-point as 265p, then Standard Life reckons the average windfall will be £1,700.

But it's a bit tricky to be precise with numbers because we do not know what the shares will fetch at flotation. Also, the average can be misleading - the insurer admits that half the eligible customers will get between £500 and £1,000.

Is it a fair amount?

The company works out your share allocation according to a complex formula, but it seems pretty fair. However, the windfall is unlikely to make up for the poor performance of the with-profits fund over recent years. The average endowment shortfall, for example, is £2,000. The recent upturn in the stock market does not seem to have helped much, either. The fund managed a return of only 16% last year and the annual bonus stands at just 2%.

Some customers are also angry that the company did not float five years ago, when the typical windfall might have been more like £5,000.

Can I get extra shares?

You will be able to buy additional shares at a discounted rate. The details of the offer have not yet been released, but it will extend to customers who are not eligible for a windfall.

Also, if you hold onto your windfall shares for at least a year, you will get one free bonus share for every 20 you already own.

Should I hold onto my shares?

Some advisers recommend that you hold on in the hope of a takeover bid, which could bump up the price. Standard Life has already been approached, but has rejected the advances, and refuses to reveal the details.

Of course, a takeover is by no means certain – and could be a long time coming. You should also bear in mind that shares are volatile and you should hang on to your windfall only if it suits your attitude to risk and your existing portfolio.

Will I have to pay tax on the windfall?

You will not have to pay tax when you get the shares, but you could be liable for capital gains tax (CGT) if you sell your holding.
If you get shares worth £1,000 and sell them immediately you will have made a gain of £1,000, according to HM Revenue & Customers. But we all have a CGT allowance of £8,800 in the current tax year, so it should be tax-free.

If your windfall is worth more than the annual CGT exemption, you could transfer some of the shares to your spouse or sell them in tranches. If you hold the shares for more than three years, you will qualify for taper relief. The relief cuts the tax rate for a higher-rate payer from 40% to 24% if you hold the shares for 10 years or more.

What will happen to my with-profits policy?

The structure of the with-profits fund will change, but you shouldn't notice much day-to-day difference.

Of course, you might want to get out of the fund because you are fed up with poor performance and see no signs of improvement ahead. Many people have been holding on to their policies to get the windfall, so advisers are expecting a mass exodus after the float. But make sure you fully understand any penalties that might apply if you leave early, or if you are giving up any guarantees on your policy.