The great attraction of Tessas is that all the interest earned on your savings is tax-free, providing you do not withdraw any of your original capital during the five-year life of the Tessa.
Because Tessa holders are prepared to tie up their savings for five years, providers usually offer better rates than on other savings accounts. The top Tessas are paying around 0.5 per cent to one per cent more than other top paying accounts.
Tessas are offered by most building societies and banks but because they offer such attractive tax-breaks, there are limits on how much you can save in them and who can have them. To open a Tessa you must be 18 or over and you are limited to one at a time. You can save up to pounds 9,000. Up to pounds 3,000 can be invested in a Tessa in year one, and pounds 1,800 can be added each year. If you invest the maximum in years one to four, you can only invest pounds 600 in year five.
Those who have already held a Tessa can invest up to pounds 9,000 from their maturing Tessa into a follow-up Tessa, providing there is no more than six months between the first maturing and the follow-up account being opened. Follow-on Tessas tend to offer slightly better rates of interest.
Both fixed-rate and variable-rate Tessas are available. The advantage of a fixed-rate Tessa is that you know exactly how much interest you are going to earn over the five-year term. But providers will often not allow you to add to a fixed-rate account after your initial deposit, so you may want to invest the full pounds 9,000, which will then be drip-fed into your account over the five year term, subject to the rules. Fixed-rate Tessas are typically paying around 6.5 per cent.
At the moment, the vast majority of Tessas on offer are variable rate and are paying much better rates of interest than fixed-rate Tessas.
Christine Bayliss, the investment editor at Moneyfacts, the monthly guide to savings and mortgage rates, says this is because providers cannot afford to offer attractive rates on fixed-rate Tessas.
"There are very few fixed-rate Tessas about at the moment because the banks and building societies are unable to obtain good rates on the money markets for investments at present. This is because the markets expect interest rates to fall over the coming years," she says.
The top-paying variable-rate Tessas offer between 8 to 8.25 per cent interest. Often the best paying accounts will be offered by the lesser- known names, such as the small regional building societies, but you will need to check if these allow people outside their local area to open an account.
One of the best deals on offer is from Norwich & Peterborough, which is paying 8.25 per cent with a minimum opening balance of pounds 100. Others paying eight per cent or more and only requiring a pounds 100 or less include Yorkshire Building Society, Julian Hodge Bank and Midland Bank.
For those looking to move money into a follow-up variable-rate Tessa, one of the top rates is 8.5 per cent being paid by Barclays, but the required opening deposit is pounds 9,000. Principality Building Society, Bradford & Bingley Building Society and Britannia Building Society are also offering good rates with a minimum balance of pounds 3,000. Leeds & Holbeck will accept from pounds 1 and Midland Bank from pounds 100. Both are paying eight per cent or more.
Abbey National 0800-100801; Barclays Bank 0800-400100; Bradford & Bingley Building Society 0800-592588; Britannia Building Society 0800-132304; Leeds & Holbeck 0500-225777; Midland Bank 0800-180180; NatWest Bank 0800- 505050; Sun Bank 01438 744505Reuse content