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

News
peopleFrankie Boyle responds to referendum result in characteristically offensive style
Sport
Harry Redknapp. Mark Hughes and Ryan Shawcross
footballNews and updates as Queens Park Rangers host the Potters
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
News
news
PROMOTED VIDEO
New Articles
i100
Life and Style
Couples have been having sex less in 2014, according to a new survey
life
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvHe is only remaining member of original cast
New Articles
i100... with this review
Voices
Holly's review of Peterborough's Pizza Express quickly went viral on social media
New Articles
i100
Arts and Entertainment
musicHow female vocalists are now writing their own hits
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
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

    Senior BA - Motor and Home Insurance

    £400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

    Market Risk & Control Manager

    Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

    SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

    £320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

    Head of Audit

    To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

    Day In a Page

    Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

    Despite the result, this is the end of the status quo

    Boyd Tonkin on the fall-out from the Scottish referendum
    Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

    Manolo Blahnik: Flats, Englishness, and Mary Beard

    The shoe designer who has been dubbed 'the patron saint of the stiletto'
    The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

    Scrambled eggs and LSD

    Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
    'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

    'Normcore': Blending in is the new standing out

    Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
    Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

    New leading ladies of dance fight back

    How female vocalists are now writing their own hits
    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam