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
newsGlobal index has ranked the quality of life for OAPs - but the UK didn't even make it into the top 10
News
people
News
people
News
peopleStella McCartney apologises over controversial Instagram picture
PROMOTED VIDEO
Life and Style
Laid bare: the Good2Go app ensures people have a chance to make their intentions clear about having sex
techCould Good2Go end disputes about sexual consent - without being a passion-killer?
Arts and Entertainment
Richard Burr remains the baker to beat on the Great British Bake Off
tvRichard remains the baker to beat as Chetna begins to flake
News
i100
Sport
footballArsenal 4 Galatasaray 1: Wenger celebrates 18th anniversary in style
Arts and Entertainment
Amazon has added a cautionary warning to Tom and Jerry cartoons on its streaming service
tv
News
people
News
The village was originally named Llansanffraid-ym-Mechain after the Celtic female Saint Brigit, but the name was changed 150 years ago to Llansantffraid – a decision which suggests the incorrect gender of the saint
newsA Welsh town has changed its name - and a prize if you can notice how
Arts and Entertainment
Kristen Scott Thomas in Electra at the Old Vic
theatreReview: Kristin Scott Thomas is magnificent in a five-star performance of ‘Electra’
News
Destructive discourse: Jewish boys look at anti-Semitic graffiti sprayed on to the walls of the synagogue in March 2006, near Tel Aviv
peopleAt the start of Yom Kippur and with anti-Semitism flourishing, one Jew can no longer ignore his identity
Life and Style
Couples who boast about their relationship have been condemned as the most annoying Facebook users
tech
Arts and Entertainment
Hayley Williams performs with Paramore in New York
musicParamore singer says 'Steal Your Girl' is itself stolen from a New Found Glory hit
News
i100
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

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Trust Accountant - Kent

    NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

    Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

    £18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

    Law Costs

    Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

    Day In a Page

    Italian couples fake UK divorce scam on an ‘industrial scale’

    Welcome to Maidenhead, the divorce capital of... Italy

    A look at the the legal tourists who exploited our liberal dissolution rules
    Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

    Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

    The vintage series has often been criticised for racial stereotyping
    An app for the amorous: Could Good2Go end disputes about sexual consent - without being a passion-killer?

    An app for the amorous

    Could Good2Go end disputes about sexual consent - without being a passion-killer?
    Llansanffraid is now Llansantffraid. Welsh town changes its name, but can you spot the difference?

    Llansanffraid is now Llansantffraid

    Welsh town changes its name, but can you spot the difference?
    Charlotte Riley: At the peak of her powers

    Charlotte Riley: At the peak of her powers

    After a few early missteps with Chekhov, her acting career has taken her to Hollywood. Next up is a role in the BBC’s gangster drama ‘Peaky Blinders’
    She's having a laugh: Britain's female comedians have never had it so good

    She's having a laugh

    Britain's female comedians have never had it so good, says stand-up Natalie Haynes
    Sistine Chapel to ‘sing’ with new LED lights designed to bring Michelangelo’s masterpiece out of the shadows

    Let there be light

    Sistine Chapel to ‘sing’ with new LEDs designed to bring Michelangelo’s masterpiece out of the shadows
    Great British Bake Off, semi-final, review: Richard remains the baker to beat

    Tensions rise in Bake Off's pastry week

    Richard remains the baker to beat as Chetna begins to flake
    Paris Fashion Week, spring/summer 2015: Time travel fashion at Louis Vuitton in Paris

    A look to the future

    It's time travel fashion at Louis Vuitton in Paris
    The 10 best bedspreads

    The 10 best bedspreads

    Before you up the tog count on your duvet, add an extra layer and a room-changing piece to your bed this autumn
    Arsenal vs Galatasaray: Five things we learnt from the Emirates

    Arsenal vs Galatasaray

    Five things we learnt from the Gunners' Champions League victory at the Emirates
    Stuart Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

    Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

    This deal gives England a head-start to prepare for 2019 World Cup, says Chris Hewett
    Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

    The children orphaned by Ebola...

    ... then rejected by surviving relatives over fear of infection
    Pride: Are censors pandering to homophobia?

    Are censors pandering to homophobia?

    US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
    The magic of roundabouts

    Lords of the rings

    Just who are the Roundabout Appreciation Society?