Money: Tax Planning and Saving: Tessa won't let you down

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For a simple way to escape paying tax on your savings, look no further than a tax-exempt savings account with your local bank or building society, writes Ken Welsby.

Unlike personal equity plans and offshore roll-ups, Tessas present no risk to your capital. The only disadvantage is that growth in savings accounts is generally lower over the long-term compared with equity-related investments.

For instance, if you had put your money into a Tessa in 1971, when the accounts were brought into being, an initial investment of pounds 9,000 would now have earned you about pounds 3,000 without incurring a penny in tax.

There are a couple of snags. As with other British tax-free savings and investment vehicles, there are strict Inland Revenue rules governing Tessas. The most important of these is that you cannot touch the capital in a Tessa for at least five years, so if your planning horizon is nearer than this, think about putting your money elsewhere.

You can only have one Tessa and there are also limits to the amount you can invest.

If this is your first Tessa you can deposit pounds 3,000 in the first year and up to pounds 1,800 in each of the following four years up to a maximum of pounds 9,000 for the account. At the end of the five-year term you can open a follow-up Tessa and pay in all the capital (but not the interest) from your first account. If that sum is the full pounds 9,000 you cannot make further deposits.

The big decision with a Tessa is whether to choose a fixed or variable- rate account. If you think that interest rates will increase over most of the next four or five years, you could opt for a variable-rate account, on which the interest will change from time to time.

A fixed-rate account allows you to predict exactly what your savings will be worth in five years and protects you from the impact of falling interest rates.

If you are looking at variable accounts, the best rates currently available are 7.2 per cent from Investec and 7 per cent from the Holmesdale Building Society. Among fixed-rate accounts, the best buys are from Sun Banking (7.5 per cent) and NatWest (7.45 per cent).

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