Tessa stands for tax-exempt special savings account, and the name means just that: you do not have to tell the tax man about it. Because of the tax-free status of Tessas, many people think that, like Peps, they must involve an element of risk. In fact, they are as safe as any other kind of deposit account. There is no risk to your capital and in the unlikely event that the institution failed, you would get your money back, thanks to the Investors Compensation Act.
Whether you are transferring money from an existing, tax-paying account or making regular savings from your salary, you need to be aware of the limits on your Tessa. First of all there is the maximum investment of pounds 9,000 over five years. Then there are restrictions on how much you can invest each year. In the first year you can deposit up to pounds 3,000. Thereafter you can put in up to pounds 1,800 a year, except for the last year, when the limit is pounds 1,800 or, whatever lower amount will take you to the pounds 9,000 ceiling.
You cannot touch the capital until the end of the five years, but the tax man will allow you to withdraw up to 80 per cent of the interest earned since April this year, and up to 75 per cent of the interest earned before that date. However, the arrangements will vary from account to account, so if you think you may want an income from your Tessa, check the small print.
The limits on income withdrawal derive from the Tessa's tax-free status. The interest which you have to keep in the account until the end of the five-year term is what you would have to pay in tax, were the money held in a standard, taxable account