Poachers open up on Tessas

Battle is being joined for pounds 24bn of accounts.

A battle for control of pounds 24bn of tax-exempt special savings accounts or Tessas is beginning to hot up, and there are signs we could be in for a war if Tessa providers start trying to poach renewal business from each other.

The first shots are being fired by Save & Prosper, the savings and investment arm of the merchant bank Robert Fleming, which is floating new Tessa products now in the hope of catching the eyes of more than four million Tessa investors and tempting them to transfer.

The Tessa was invented by John Major when he was briefly Chancellor in 1990, and allowed investors who put money into a Tessa account to keep the interest free of income tax provided they held the account for five years. Investors can invest pounds 3,000 in the first year, and pounds 1,800 in years two to five, building up to a maximum of pounds 9,000.

Tessa holders are already free to transfer funds to another provider if they want without losing tax advantages. The great majority have stayed loyal, partly through inertia, partly because most Tessa providers built in transfer penalties and/or terminal bonuses when most accounts were opened in 1991, and most holders will want to stay the course.

There are now 4.05 million Tessa accounts, but 98 per cent of them were first opened in the first six months of the scheme in 1991, and will have completed their qualifying period within the first six months of 1996. The holders will then be completely free to shift their Tessas to another home without risk of penalties or loss of their tax advantages.

Almost 60 per cent of holders have taken their full entitlement each year and already hold the pounds 9,000 maximum allowed. Another 28 per cent made an initial deposit and have not added to it since, either because they had no more spare capital and could not manage to save anything more out of income, or because they were disillusioned by the drop in the interest rates they could earn.

When Tessas were first introduced interest rates were well into double figures and rates of 14 per cent tax-free were on offer. But virtually all Tessas have been variable rather than fixed-rate offers and the interest earned has fallen steadily to a low of around 6 per cent last year before starting to edge higher. Most variable-rate Tessas now offer 6.5-6.75 per cent.

The Chancellor, Kenneth Clarke, signalled his intention of renewing and rolling over existing Tessa rules in his Budget last November, allowing investors to keep their existing pounds 9,000 maximum and add a similar sum over the next five years.

But many banks and building societies have expressed concern that, with interest rates currently half the initial levels of 1991, investors may be tempted to take their tax-free entitlement and invest it in higher- yielding products and more flexible tax-free products such as the fashionable corporate bond personal equity plans.

With one eye on the competition, Save & Prosper this week announced a new Tessa account paying a guaranteed fixed 7.5 per cent tax-free for the next five years. It guarantees that an initial deposit of pounds 9,000 from an existing Tessa will grow to pounds 12,920 by 2001 if no interest is withdrawn.

If investors transfer their existing Tessas to S&P it is also offering to pay the 7.5 per cent on the entire balance of all Tessas transferred from another provider until the maturity date of those existing accounts. The offer is open to all holders of Tessas maturing in the first five months of 1995 provided they agree to open another Tessa with Robert Fleming.

Investors who do not at present have a Tessa can also invest up to the maximum of pounds 3,000 for a first year's instalment and qualify for the 7.5 per cent guaranteed rate, although additions in subsequent years will qualify for whatever is the going rate at the time they are made.

Investors who want to take income from their Tessa will be paid a guaranteed 7.3 per cent tax-free payable every three months. The Tessa will, however, be invalid if any capital or more than 75 per cent of the accumulated interest is withdrawn.

Barclays Bank announced a new fixed-rate Tessa two weeks ago, offering a guaranteed 7.4 per cent tax-free for two years, after which the rate will revert to the going variable rate at the time. Other providers are actively considering plans for long-term sweeteners to persuade existing holders to stick with them and up-front offers probably for a limited period to tempt others to transfer across.

Investors can expect announcements any time, but should wait until all the offers are on the table before taking any action.

Start your day with The Independent, sign up for daily news emails
Suggested Topics
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search

Will your credit card rewards be scrapped following new EU rules on charges?

Providers are unhappy with new EU rules - but ultimately it is customers who will have to foot the bill
There remain more than a million unclaimed Premium Bond prizes worth collectively around £48m

Have you won £1m in the May Premium Bonds draw?

More than £60m was paid out to more than 2 million prizewinners this month

The 0 per cent introductory deals that credit cards offer are one of the most odious tricks

Beware credit card firms’ odious tricks

Why can’t we just have open and honest charges, without all the cross-subsiding?

The pound’s recent strength against the euro could be hit by economic uncertainty under a new government

How planning can make your travel cash go further

With the pound at a high against the euro, it pays to buy now before uncertainty post-election

Put the phone down on the coldcallers who see pension liberation as an opportunity to liberate your pension from you

Pension freedoms: How to deal with cold calls from scammers

Sean O'Grady offers advice on keeping your money safe
Switching to a better bank account is much easier than it used to be

More people are switching current accounts – but what do the figures mean?

Experts disagree about the 7% increase over the past year

The chance of getting what appears to be free money can be hugely attractive, especially to first-time buyers who can be fooled into thinking it’s extra cash to buy the essential new items they need for their dream home.

Beware the boom in cashback mortgage deals

Too many mortgages are being sold with misleading gimmicks

The firm’s revenues slumped by a third to £217 million in a disastrous 2014

Wonga results could get even worse this year, chief admits

The firm’s revenues slumped by a third to £217 million in 2014

The cost of a buildings policy has dropped by 10.1 per cent over the year, with the cost of a contents policy falling by 8.2 per cent

Simon Read: Mild winter cuts the cost of home insurance

The average quote for a buildings and contents policy has fallen by 3.6 per cent

Don't count your retirement money yet: employers will stop receiving a pension rebate next year and their staff may lose out

Defined-benefit pension schemes: Rebate change in 2016 may leave you out of pocket

Employees in defined-benefit schemes are held up as the lucky ones, but the state pension scheme will be overhauled in April 2016
Labour will raise the national minimum wage to more than £8 an hour by October 2019 (EPA)

Barclays new Blue Rewards hands cash to customers. What’s the catch?

Joining Barclays Blue Rewards costs £3 a month but then lets customers in for handouts of up to £15 a month

New research reveals that despite the recovering economy, four out of five low-income households have seen no sign of their financial situation improving

Hard-up families could be eligible for financial help

A charity is urging anyone struggling financially to see if they could get help from the state

When is the best time to buy foreign currency?

Video: With an election looming, a hung parliament could hit sterling

General Election 2015: Vote for the party that will boost your finances

Experts warn that the general election is unlikely to lead to stable markets. Simon Read talks to two investment managers who are advising caution

Make the most of your money in 2015-16: The end of the tax year is the beginning of the next...

The new tax year brings with it a raft of new rules and regulations
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Claims Administrator

    £16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

    Recruitment Genius: Senior SEO Executive

    £24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

    Recruitment Genius: Online Customer Service Administrator

    £16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

    Recruitment Genius: Digital Marketing Executive

    £18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

    Day In a Page

    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

    Everyone is talking about The Trews

    Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living
    Increasing numbers of homeless people in America keep their mobile phones on the streets

    Homeless people keep mobile phones

    A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before
    'Queer saint' Peter Watson left his mark on British culture by bankrolling artworld giants

    'Queer saint' who bankrolled artworld giants

    British culture owes a huge debt to Peter Watson, says Michael Prodger
    Pushkin Prizes: Unusual exchange programme aims to bring countries together through culture

    Pushkin Prizes brings countries together

    Ten Scottish schoolchildren and their Russian peers attended a creative writing workshop in the Highlands this week
    14 best kids' hoodies

    14 best kids' hoodies

    Don't get caught out by that wind on the beach. Zip them up in a lightweight top to see them through summer to autumn
    Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

    The acceptable face of the Emirates

    Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk