The ISA makes room for TESSA

If your TESSA will mature this year, consider investing in a Tessa-only ISA
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The Independent Online

Over £21 billion worth of TESSAs owned by some two million savers are due to mature this year, and the Government has introduced a successor for them - the "TESSA-only ISA".

Over £21 billion worth of TESSAs owned by some two million savers are due to mature this year, and the Government has introduced a successor for them - the "TESSA-only ISA".

The name may be cumbersome, but the new product will enable you to maintain the capital part of your maturing TESSA tax-free.

When TESSAs were introduced in 1991, you paid up to £3,000 into them for the first year, another £1,800 each year for the next three years, and a final £600, making a total of £9,000 over five years. In January 1996 the second generation of TESSAs became available. You were allowed to roll over your £9,000 capital - but not the interest - into a "Tessa 2" for a further five years. Then, two years ago, Gordon Brown abolished TESSAs and PEPs in favour of ISAs (Individual Savings Plans). You could still take out TESSAs up to the end of the 1998 tax year.

If you want to keep your TESSA savings tax-free at the end of the five year term, you can do so by investing in a deposit-based ISA. There are three options open to you:

1) a TESSA-only ISA

2) a mini cash ISA

3) the cash component of a maxi ISA

Once your TESSA has matured you have only six months to move your savings into an ISA. Once the six months have elapsed, your tax-free TESSA allowance will be lost for ever. Remember, putting your £9,000 of TESSA capital into an ISA has absolutely no effect on your annual ISA allowance of £7,000.

You cannot "roll over" interest earned in your TESSA, only the £9,000 capital. And this time the period of saving will not necessarily be five years. Some market-linked TESSA-only ISAs will last for ten years. If you do opt for a TESSA-only ISA, you are under no obligation to invest in one with your existing bank or building society. Your provider must give you a "TESSA maturity certificate" that leaves you free to shop around for the best deals.

There are 4 main types of TESSA-only ISA:

1) Variable rate TESSA-only ISA

This works in the same way as a regular savings account. Your interest rate will fluctuate in line with the general level. Most of these accounts offer easy access.

2) Fixed rate Tessa-only ISA

This TESSA-only ISA offers a rate of interest that won't alter. Your money will usually be tied up for a set period - most commonly for between one and five years.

3) Escalator Tessa-only ISA

This account offers a fixed rate of interest that increases each year.

4) Stock market linked Tessa-only ISA

This account, which was introduced in 1996, keeps your capital secure as well as offering you returns that are linked to a stock market index.

* The Chase De Vere Guide to Maturing TESSAs is available by calling 0845 609 2005, or by clicking on www.chasedevere.co.uk

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