It's time to take a look at your Tessa

You could be getting 2 per cent more interest
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The Independent Online

The Tessa is dying. We already know she's been given little more than four years to live. But that doesn't mean she should be allowed to just fade away. There is life in the old girl yet.

The Tessa is dying. We already know she's been given little more than four years to live. But that doesn't mean she should be allowed to just fade away. There is life in the old girl yet.

In some of the more critical cases, you can see her interest waning before your eyes, as banks and building societies switch attention (and their headline-grabbing best rates) to the ISA, Tessa's half-sister.

The contrast between the most spritely and the sickliest interest rates for equivalent Tessas with different providers can be huge, sometimes more than two percentage points. That means savers with the wrong Tessa could miss out on hundreds of pounds over the remainder of the five-year term.

For instance, for people with a follow-on Tessa with the full £9,000 invested, an account paying 6.5 per cent earns £585 annually and would be among the top tier of products available. Those whose Tessa pays 5.3 per cent, close to the worst rates currently offered, will earn annual interest more than £100 lower. Sickening, isn't it?

Phil Midgley, independent financial adviser at Zenith Life and Pension Services, says the problem has been exacerbated because a lot of Tessa holders did not understand that they were buying a variable-rate account. He says: "In our experience, a substantial number of clients coming to us took out Tessas and misinterpreted them as fixed-interest products. It is not uncommon to come across people who have been sorely disappointed by their eventual returns."

According to the analysts Moneyfacts, the Co-operative Bank, Northern Rock and Halifax have poor interest rates on both first Tessas and follow-on accounts. Woolwich, the worst offender among first Tessas, offers just 4.5 per cent annually.

The problem is a loophole in the Banking Code, to which all the high street banks and building societies have signed up. It demands that they don't reduce (relative to similar accounts) the interest rates on accounts which are no longer on sale to new customers. People with those accounts must get the same rates as accounts with "similar features", or at least be offered the chance to move to the better product.

However,Tessas and ISAs are not deemed similar enough to fall within the code. The result is that some Tessa-holders are losing out. The solution is simple: move your money.

"You could be paying the higher rate of interest within a week," according to Sian Hughes, the senior product manager at HSBC. "It's simple, but a lot of people think it's too much hassle. Providers work on the principle that people will just leave their money where it is, which is why they concentrate on new products."

In fact, transferring your Tessa couldn't be easier. There's no need to tell the tax office. Simply contact the bank or building society with the best rates to check if their Tessas accept transfers from elsewhere, give them the details of your existing account, then wait for them to do the paperwork. Ker-ching.

Or perhaps ker-ouch. Look deeper, and transferring your Tessa might seem much less attractive. Many accounts have built-in penalties for abandoning your current provider that can make it look like you are trapped. You might be stung for a fixed-rate penalty fee of up to £40 or, perhaps worse, a loss of two, three, or even six months' of interest.

A transfer penalty of three months loss of interest on that poor performing 5.3 per cent Tessa would lose you £120, meaning that moving to a top-tier Tessa will put you at a disadvantage for a whole year.

If your Tessa does not have all that much longer left to run, it probably won't be worth switching. However, savers who might have opened new or follow-on accounts in the dying days of the pre-ISA regime should remember they are locked in for the remainder of the five-year term if they want to keep their tax benefits. They might do best to pay a charge now in anticipation of a little bit more jam tomorrow.

Although these could change as the effects of Thursday's interest rate rise work through in the coming weeks, Moneyfacts reports that the Tessa transfer stars currently include:

First Direct, which tops the table for both first and follow-on accounts, with 6.85 per cent in interest The Nationwide Building Society, with 6.6 per cent HSBC, with 6.5 per cent Furness Building Society, with 6.75 per cent on a follow-on Tessa and 6.5 per cent on a first account.

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