After five years, Toisa savers get a wake-up call
As the special savings accounts come to maturity, investors must take action to protect the tax break
Sunday 11 December 2005
We may have seen the back of Tessa, former friend to millions of savers, but her successor is already asking questions of investors. More than £7bn of cash kept legitimately out of the taxman's reach in special savings vehicles now needs urgent attention from savers if they are to avoid a tax bill.
The tax-exempt special savings account was launched nearly 15 years ago by the Major Government as a low-risk product where ordinary investors could put their cash for five years, and not pay tax on the interest.
After Tessas were abandoned in 1999, when Labour introduced the individual savings account (ISA), the money saved within them needed to be channelled into a new home. And so Toisa - a Tessa-only ISA - was born.
These savings vehicles were available only to previous owners of Tessas and were afforded the same tax breaks. Most Toisas were, like their predecessors, cash deposit accounts. But plenty of savers chose to invest part of their money in the stock market - encouraged by the then roaring FTSE 100. Returns from these Toisa equity investments were still tax exempt.
Government rules also protected the money saved under the scheme. Financial service providers offering Toisas had to guarantee to return the original investment at the end of the five-year term, regardless of what happened to the stock markets.
In the 2000-01 tax year, when the markets were still performing robustly, huge sums were switched over to Toisa accounts. Up-to-date figures from Revenue & Customs reveal that 962,000 ordinary investors rolled over more than £7bn into more than a hundred different savings products. Most were for a minimum of five years, and the first ones are due to start maturing early in the new year. Investors will therefore need to find a new home for hundreds of millions of pounds of their own money.
HSBC, the dominant Toisa provider, has close to £250m maturing in the first few months of 2006 from its HSBC Performance Plus ISA. Bristol & West (B&W) has around £40m maturing between 1 January and 6 April. Birmingham Midshires and Newcastle Building Society are also providers in the Toisa market.
But customers' right to save tax-free could be lost for ever if they fail to renew their maturing products. If you rolled over your Tessa money into a Toisa early in 2001 and have yet to plan or decide what to do with the cash, you need to take action. If you contact your Toisa provider now, you should be able to switch into rollover Toisa products that match your current product, either cash or equity-linked.
For those who take no action, problems could arise, although not everyone is vulnerable. For example, a forgetful B&W customer whose Toisa is about to mature will have their money transferred into the provider's mini cash ISA, where it will carry on earning interest (although this will be at rates lower than the Bank of England base rate).
However, unlucky savers will find that their investments lose their tax-free status if left untouched. If they are not reinvested within six months, tax will be charged on any future gains. The Toisa tax break is worth keeping - it doesn't affect your annual ISA allowance, and it would be a real loss to let go of this perk.
Poor returns from stock markets (particularly between 2001 and 2003) mean that if you were one of the many who chose an equity-linked Toisa, you probably won't get much more than your original capital back. Understandably, you may be less than enthusiastic about adopting the same strategy again.
For this reason, those Toisa vehicles that offer guaranteed returns, an income stream or an early release from the scheme (in less than five years) are expected to be popular, says Christopher Taylor, director of structured products at HSBC Investments, part of the banking giant.
"Some 85 per cent of our customers rolling over next year are aged from 50 to 80 and will have more call for income," Mr Taylor says.
Early details of HSBC's plans to tempt people to roll over their Toisa money show the group intends to promote a scheme in which half the money goes into a product offering 50 per cent of the growth in the FTSE 100. The rest will be placed in what is, in effect, a savings account, again provided by HSBC bank. Over a five-year term, this will pay 0.5 per cent over Bank of England interest rates each year, or 1 per cent above base rate annually over six years. This, HSBC believes, will provide the income older savers want.
Woolwich Plan Managers - a financial services product arm of the Woolwich bank - is also hoping to tempt sceptical investors. It is offering either a minimum return of 124 per cent of the money they roll over, or an as yet unspecified percentage of any rise in the FTSE 100.
B&W, while currently offering a Toisa scheme linked to the FTSE 100, is considering a new issue for March aimed at more adventurous investors. It will link returns to a selection of overseas stock markets.
Calling all early birds: Four options for your nest egg
Your money will be paid into a mini cash ISA account.
Some providers will let it sit there earning a low level of interest, tax-free, for as long as you want. With others, you could lose your tax breaks after six months.
If you intend to reinvest your cash, act quickls. Providers can be slow in sending the paperwork for investors to switch accounts.
Move your money into a pure cash account
You can do this either with your existing provider or with another one. Your money will be protected from the whims of the stock market, making it an ideal option for cautious savers. The capital cannot be lost - but if interest rates fall or inflation rises, it might lose its worth in real terms.
Higher returns can often be made over the longer term by investing in shares and bonds.
Choose another equity-linked Toisa product
This can provide higher returns than a cash account, but if stock markets go down you will get back only your original money.
A major consideration here is whether you require a guaranteed return. If you are saving up for something specific, you will need to be comfortable with the risks involved in investing in shares.
Take your money out and invest directly in equity funds
This is the highest-risk of the four options, but the one favoured by many financial advisers - perhaps not surprisingly, given that they stand to benefit from commission.
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