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Tessas still have the best figures

Tax-Exempt special savings accounts were launched by the then Chancellor of the Exchequer, John Major, in January 1991 and have since proved a great success, attracting 5 million savers. All the big banks and building societies offer them.

But despite their obvious popularity, the Government is to change the rules for Tessas and PEPs in April 1999 when the Individual Savings Account (ISA) is introduced. No details about ISAs are available, although it is thought unlikely you will be penalised if you already have a Tessa when they are introduced.

You must be at least 18 to open a Tessa and you can only have one at any time. Over the five-year term, up to pounds 9,000 can be saved in a Tessa. Subject to this limit, you can deposit up to pounds 3,000 in the account in the first year, and up to pounds 1,800 in each of the next four years. Savers with maturing Tessas are not subject to these annual limits but can immediately "roll over" up to pounds 9,000 into a new Tessa provided they do so within six months.

Interest earned in a Tessa is tax free. But no capital can be withdrawn from the account during this period without losing the tax perks, although you can withdraw the equivalent of the after-tax interest earned on your money without penalty.

Both fixed-rate and variable-rate Tessas are available. Currently, the rate of interest on the best-paying variable Tessas is slightly more than that available on the fixed-rate Tessas. For details see our table of Best Savings Rates on page 12.

Two of the top-paying variable-rate Tessas are those of the Royal Bank of Scotland (0800 121121), which is offering 7.65 per cent and requires a minimum deposit of pounds 500, and Principality Building Society, which also offers 7.65 per cent interest but requires a minimum deposit of pounds 2,500.

The rates available on follow-up Tessas are slightly higher. Staffordshire Building Society (01902 317485) is offering 7.75 per cent but you can only open one with the full pounds 9,000, while Nottingham Building Society (01159 481444) also offers 7.75 per cent but requires a minimum deposit of pounds 3,001.

A number of banks and building societies offer stock market-linked Tessas. As with other Tessas there is no risk to your capital, but the rate of interest you receive is based on the performance of the stock market. So if the stock market does well, savers benefit. However, if shares fail to perform over the five years, the returns will be poor.

The way interest is calculated on these Tessas varies. Some will match the growth of the stock market over the five-year term. So if it grows by 50 per cent, you will receive 50 per cent interest. Others promise a minimum return of, say, 25 per cent on your Tessa savings, but if shares go up more than this, you receive a higher rate of interest.

Usually the FT-SE 100 index of leading shares is used to calculate how the stock market has performed. The starting point may be the average closing level of the FT-SE 100 during the first month of the Tessa, while the final level of the FT-SE may be the average of the last one or six months of its life. This will iron out any daily fluctuations so there is no danger of the bank or building society choosing a particular starting or ending day when the stock market performs particularly well or badly.

Birmingham Midshires (0645 720721), Bristol & West (0117 979 2222), and HSBC (0800 369000) are offering stock market-linked Tessas. Abbey National (0800 100801) offers a stock market-linked Tessa that works differently; it pays 1.5 per cent interest for every month that both the main UK and US stock market indices rise. The potential return on this Tessa is 14.7 per cent a year. So far this year the two indices have both risen on five out of eight months, so the Tessa has already earned 7.5 per cent interest. While the interest earned on this Tessa cannot be taken away, savers are dependent on both markets rising in a month if they are to earn interest.

Anyone thinking of starting a Tessa now should not be put off. They usually offer better rates of interest than other savings accounts, even after tax.