To keep or sell with A&L

It's decision time for two-and-a-half million savers and borrowers with the Alliance & Leicester building society: do you want the society to sell your windfall shares for free and send you the cash, or do you want to keep the shares?

The pounds 1,100-a-head windfall is the first in a series of five expected from building societies this year. Further payouts should follow in swift succession from the Halifax in June, Woolwich in July, Bristol & West in August and Northern Rock in October.

Savers and borrowers who are eligible for the free shares, due to start trading on the stockmarket on 21 April, should by now have received a form from A&L asking them if they want to sell, for free, as soon as stockmarket dealings start, or if they want to keep the shares. This form should be returned by April 11. Unless you could really use the cash now, perhaps because you have credit card debts on which you are paying high rates of interest, you might well benefit from keeping the shares, at least for the moment.

Rob Thomas, building societies' analyst with UBS, the stockbroker, rates the shares a "hold". The shares would not be immune from a full-blooded stock market crash. But he highlights two reasons why they should perform well compared with the stock market as a whole and hence why shareholders stand to benefit by not selling immediately.

The first is that there will be strong demand from big City investors for the shares because of the size of the soon-to-be bank and because buying them in the stock market is the only way for these investors to get hold of the shares. This should keep the price up for some time. Second, with the housing market recovery continuing, A&L should be set for good profits as a business.

The possibility of A&L paying a special dividend or otherwise handing back some of its capital to investors and in the longer term becoming a takeover target are further reasons why shareholders might benefit from holding.

As well as any increase in the share price holders of the shares will also be entitled to dividends, as with any big company. The first dividend is due in October and is likely to be 6p or more a share, perhaps a total of pounds 15 on the standard 250 shares apiece handout. Over the first year the dividends should be worth at least pounds 40, perhaps 4 per cent more of what the shares might be worth initially.

If you choose to keep the shares A&L offers the choice of having them held in its Sharesafe Account or of sending you a share certificate.

Most people are likely to be best-off asking for their share certificate. Choosing the Sharesafe option means holding the shares electronically with A&L, but it also means that if you should want to sell the shares subsequently you will find it difficult to do so except through A&L. This may not be the best deal financially.

If you want to put your shares in a PEP, so making all dividends and profits tax-free, you should also get hold of the share certificate.

Alliance & Leicester itself is offering a number of PEP deals but most people should consider PEPs managed by another financial company.

They should also look to PEP their shares within 42 days (six weeks) of them being issued. This way the shares do not count towards the normal annual investment limits. So with most Peps, this means you can PEP them on top of the normal limit of pounds 6,000.

Windfall shares can only be put in Peps taken out in the tax year just started. Many of the big-name unit trust companies selling Peps have deals that will take in a whole range of windfall shares and these are the ones most investors should go for.

Most special windfall Pep deals will make some charges for taking and holding the shares, some may require you to swap your windfall shares for in-house investment funds and whichever PEP you choose will limit your investment choices for the rest of the year. Putting your windfall shares in a PEP managed by, say, Fidelity, a unit trust company, means that any cash you wanted to put into your pounds 6,000 PEP this year could only go into Fidelity unit trusts.

We will cover the PEP choices in more detail nearer the date of the handout. In the meantime, if you want to hold the shares do not forget to choose the share certificate option on the form.

If instead you want to sell immediately, A&L will do this free if you choose the sell option. Your shares will be batched up with those of other sellers and the price you get will be based on the average price in a number of auctions to big City investors. You will get your money by the end of the month.

q If you have not received the form asking you to choose what to do with your shares and you think you are eligible for the handout, call 0990 785163. Johnson Fry, an investment manager, has produced a free guide to the Pep options for windfall shares. Call 0171-451 1199.