What to do with savings after Tessa bows out

Say hello to the Toisa, writes Annie Shaw, but we must follow the rules to keep on saving that tax
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Gordon Brown may have said goodbye to prudence several budgets ago, but soon we will be saying farewell to Tessa as well. The last of the Tessas (tax-exempt special savings accounts) are maturing, and the £3.7bn invested in them will be looking for a new home.

The obvious home for maturing Tessa cash is a Toisa, a Tessa-only individual savings account. This is a special Isa that takes only the capital, not the interest, from a Tessa and can be held in addition to other types of mini- and maxi-Isas.

Toisas are more flexible than Tessas, which did not let holders withdraw capital during the term without losing the account's tax-free status, although you could withdraw interest. Toisas do let you make withdrawals, but you cannot top the account up again after you have withdrawn the cash. A further advantage of a Toisa is that it does not mature and can be held indefinitely, or until a chancellor changes the rules.

If you cannot make your mind up immediately where to put the money from your Tessa, there is a breathing space of six months from the maturity date to find a new account. If you go beyond that you will lose the tax-free status. But your money will probably be languishing in a standard account that is likely to pay a poor rate of interest, and will attract tax into the bargain.

Savers can choose from fixed rate and variable rate Toisas, and even those where the return is linked to the performance of the stock market. But Susan Hannums, savings manager at the adviser Chase de Vere says: "Variable rates are creeping up and it might be better to go for a variable rate and then fix later on if you are looking for that sort of security."

If you are feeling a bit more adventurous, some Toisas allow you to combine capital security with stock market exposure. The return here is based on the performance of the FTSE l00 or other indices over a five year period. Your capital is guaranteed, but instead of receiving straight interest, your return depends on the performance of the indices or interest rates.

Justine Fearns, research manager at Chase de Vere, agrees. She says: "Unlike precipice bonds or other market-linked products these products really are guaranteed."

Wesleyan Savings Bank, the banking arm of Wesleyan Assurance Society, has a Toisa linked to 90 per cent of the growth in the FTSE 100 Index. It is available until April 5. Bristol and West, part of Bank of Ireland, has a similar product.

After you have found a home for the capital from your Tessa, your next task is to find a home for the interest. If you want to keep this money tax-free too, the best place for it is probably an ordinary cash Isa, if you have not used up your allowance. You can put up to £3,000 into a mini cash Isa in any one tax year, although this is falls to £1,000 from April 2006 on new investments.

If you use your mini-cash Isa allowance you will be prevented from opening a maxi-Isa in the same tax year. This means you will not be able to put the full £7,000 a maxi-Isa permits into equities. So if you want exposure to the stock market as well as keeping the interest from your Tessa risk-free and tax-free, you will be restricted to a mini-equity Isa for shares you wish to shield from tax.

'Just £1,600 interest over five years seemed miserly'

Terry Yearsley, 57, a part-time parish clerk, had a Tessa with Yorkshire building society that has just matured. "I got only £1,600 in interest in five years, which seemed miserly," he says.

His son, Ben, a financial adviser at the IFA Hargreaves Lansdown, has persuaded him to move the money to an HSBC Toisa linked to the FTSE 100 index. "I suppose Ben is protecting his inheritance," Mr Yearsley says wryly.

His son says: "The capital is fully protected, so the most you could lose would be the notional interest. It's fully linked to any rise in the FTSE 100 over the next five years with no cap. The index is averaged over the final year to protect investors from sudden falls."

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