The trouble with Tessas

TAX PLANNING: Tessas started out as a simple way to make regular savings. Six years on and with the second issue, things are a lot more complicated. Tony Lyons lends a guiding hand

Tax-exempt Tessas provide an attractive way to save if you are prepared to invest for the full five-year term. Since launch six years ago, over pounds 27bn has been invested in over 4 million accounts. Today, even though interest rates have fallen, they still offer attractive packages. But what was meant to be a simple means of regular saving has become more complicated as the banks and building societies have introduced new, competing products.

The basic Tessa allows you to save up to pounds 9,000 over five years with the interest rolled up free of all tax. The average return from a maturing Tessa has been just under pounds 11,500. When your first account matures, you have six months to decide whether to invest the full pounds 9,000 capital in a Tessa mark two.

There are now several types of Tessas on offer, whether for maturing accounts or new savers.

Usually the highest interest rates apply to the larger investments. It can also depend on where you live - as small, local building societies often offer the best interest rates but only to those who reside in their catchment area.

Your capital is not at risk in a Tessa - other than from inflation - but you should think about the level of certainty you are looking for.

The first choice is between a variable and a fixed interest rate plan. If you feel - as most financial experts do - that interest rates are likely to rise, then a variable rate will be more attractive. Most are linked to bank base rate and currently offer 7-7.25 per cent.

Fixed-rate Tessas, linked to money market rates, offer around 7.5 per cent. Some institutions offer a fixed rate for the first, and even second year, with variable rates thereafter.

To lock savers in, some providers offer a relatively low rate, typically 6 per cent a year, with a bonus of 1.5 per cent on the total at maturity. Others offer a tiered rate where, the larger the amount being saved, the higher the rate of interest.

A further complication comes from those offering escalating rates. Usually for second Tessas, a typical example will be 5.75 per cent in year one, 6.5 per cent in year two, 7 per cent in year three, 8 per cent in year four and 9 per cent in the last year.

Recently, a handful of providers have introduced a new, higher risk account. These are equity-linked schemes. They usually guarantee a low rate of interest plus an additional amount which depends on the rise in stock market values.

One example offers 4 per cent simple interest plus the percentage rise in the FTSE 100 over the five-year saving period. Another, from Abbey National, offers 1.15 per cent interest for each month that both this index and Wall Street's S&P 500 rise, but nothing if they fall. Over most five-year periods, stock markets usually rise. But there are no guarantees that this will always be the case.

If the local building society does not offer an attractive scheme, choosing between the different types of Tessa will depend on your view of the future. Historically, interest rates are low and most experts think they will rise during the course of the next five years. This means that variable interest rates are more attractive while equity-linked Tessas are for those who think the stock market will continue booming.

But always remember, most Tessas can be transferred if you change your mind. This means that they can be switched later on to a higher fixed rate if interest rates rise.

The usual penalty for this is a loss of between 30 and 90 days' interest, higher for fixed rate and equity-linked schemes, or up to pounds 30 in administration fees. But some of the high-performance accounts quote such high charges for transfers that you will inevitably be better off staying put

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
Arts and Entertainment
John Hurt will voice Prince Bolkonsky in Radio 4's War and Peace
radioRadio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
News
people
Arts and Entertainment
Avatar grossed $2.8bn at the box office after its release in 2009
filmJames Cameron is excited
News
news

Lincoln MP Karl McCartney 'denied all knowledge' of the Twitter activity

Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
filmDirector said film would 'never have been financed' with ethnic minority actors in key roles
Arts and Entertainment
Stik on the crane as he completed the mural
art
News
The author PD James, who died on 27 November 2014
people

Detective novelist who wrote Death comes to Pemberley passed away peacefully at her home, aged 94

Arts and Entertainment
Jennifer Lawrence as Katniss Everdeen in The Hunger Games: Mockingjay Part 1
arts + ents
Life and Style
tech

Sites using the popular Gigya comment platform were attacked by the Syrian Electronic Army (SEA)

Extras
indybest
News
people
Finacial products from our partners
Property search
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

    Argyll Scott International: Service Desk Analyst

    £20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

    Argyll Scott International: 2x Service Desk Analyst

    £20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

    Recruitment Genius: Senior Execution Trader

    £30000 - £250000 per annum: Recruitment Genius: A global Rolling Spot FX, Comm...

    Citifocus Ltd: ACA - Financial Reporting

    £Attractive Package: Citifocus Ltd: Chartered accountant (ACA or CPA), must be...

    Day In a Page

    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
    Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

    Sol Campbell cries foul at Labour's mansion tax

    The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
    Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

    Sarkozy returns

    The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
    Is the criticism of Ed Miliband a coded form of anti-Semitism?

    Is the criticism of Miliband anti-Semitic?

    Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
    Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

    Ouija boards are the must-have festive gift

    Simon Usborne explores the appeal - and mysteries - of a century-old parlour game
    There's a Good Girl exhibition: How female creatives are changing the way women are portrayed in advertising

    In pictures: There's a Good Girl exhibition

    The new exhibition reveals how female creatives are changing the way women are portrayed in advertising
    UK firm Biscuiteers is giving cookies a makeover - from advent calendars to doll's houses

    UK firm Biscuiteers is giving cookies a makeover

    It worked with cupcakes, doughnuts and macarons so no wonder someone decided to revamp the humble biscuit
    Can SkySaga capture the Minecraft magic?

    Can SkySaga capture the Minecraft magic?

    It's no surprise that the building game born in Sweden in 2009 and now played by millions, has imitators keen to construct their own mega money-spinner
    The King's School is way ahead of the pack when it comes to using the latest classroom technology

    Staying connected: The King's School

    The school in Cambridgeshire is ahead of the pack when it comes to using the latest classroom technology. Richard Garner discovers how teachers and pupils stay connected
    Christmas 2014: 23 best women's perfumes

    Festively fragrant: the best women's perfumes

    Give a loved one a luxe fragrance this year or treat yourself to a sensual pick-me-up
    Arsenal vs Borussia Dortmund: Alex Oxlade-Chamberlain celebrates century with trademark display of speed and intuition

    Arsenal vs Borussia Dortmund

    The Ox celebrates century with trademark display of speed and intuition
    Billy Joe Saunders vs Chris Eubank Jnr: When two worlds collide

    When two worlds collide

    Traveller Billy Joe Saunders did not have a pampered public-school upbringing - unlike Saturday’s opponent Chris Eubank Jnr
    Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

    Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

    Our partner charities help veterans on the brink – and get them back on their feet
    Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

    Putin’s far-right ambition

    Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
    Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

    Escape to Moominland

    What was the inspiration for Finland's most famous family?