Tax-Exempt Special Savings Account: You can still win even if you bail out early

Click to follow
The Independent Online
One of the first things that everyone learns about a Tessa is that it is a long-term investment that effectively locks up your money for a five-year term. But even if you are unsure that you can leave your capital untouched for the full five years, to qualify for tax-free interest, you could still consider such accounts a home for your savings. Why? Because the net return offered by a Tessa, after tax, normally compares favourably with a standard building society savings account. Take TSB's variable Tessa, which pays 6.5 per cent. If you cash it in early you will get 5.2 per cent after (basic rate) tax, and the minimum investment is only pounds 250.

Compare this with the terms offered on standard saving accounts such as TSB's 60 Day notice account. You need at least pounds 500 initial deposit and then the interest is just 3 per cent, and that is before tax. With the standard accounts you generally get a higher rate of interest the more you save, but even with, say, pounds 10,000 in the 60 Day account you will get just 4.3 per cent, again before tax.

The Tessa net return of 5.2 per cent beats its competing savings accounts hands down and still gives you the prospect of getting the better tax- free return of 6.5 per cent if you can last out for five years. Or consider Bromwich Building Society's Tessa, which pays 7 per cent on balances from pounds 250. This works out as a net rate of 5.6 per cent.

The catch is that there are often penalties for early encashments of Tessas, which can be 30, 60, 90 or 120 days' loss of interest. Some accounts also charge a fee. Fixed rate Tessas, though not some variable-rate Tessas, will almost certainly charge you for early encashment.

There obviously would be no point in opening a Tessa carrying a 90-day or 120-day penalty if you were not certain that you would not need to touch the cash for the full five years.

These penalties are unlikley to be flagged up by your bank or building society, so it is important to ask or check.

It is also worth remembering that you are allowed to withdraw up to 80 per cent of the interest from your Tessa without forfeiting its tax-free status.

Looking for credit card or current account deals? Search here