Testing times for Tessa holders

Savers should look to see what lenders are offering before the leap for Tessa 2. By Alison Eadie

The Tessa 2 season is fast approaching and building societies and banks are feverishly finalising plans to hold onto the money they already have and attract a fresh wave.

The popularity of Tessas (tax exempt special savings accounts) when launched nearly five years ago means pounds 16bn will mature in the first quarter of next year, according to an estimate from the Building Societies Association.

The challenge for Tessa providers is how to keep hold of this money and prevent it being scooped by more tempting Tessas from other providers or by competing investments.

In January 1991, the most competitive Tessas paid interest at 15.3 per cent. Now the best rate from Britannia Building Society is a fixed 7.65 per cent.

Most variable-rate Tessas pay less than 7 per cent. By contrast the new kid on the block, corporate bond personal equity plans, provide a tax-free yield in many cases of 8 per cent and more.

Nationwide Building Society recently asked MORI to find out what Tessa- holders planned to do. The research showed that 74 per cent of people intended to reinvest all or part of their capital, but only 61 per cent were planning to reinvest it in a Tessa.

That still means up to pounds 10bn could find its way back into Tessas. Most building societies and banks accept that they are going to have to provide a choice of Tessas, including variable and fixed rates.

A spokesman for Abbey National said: "The bog-standard Tessa of five years ago is not enough. Customers are more sophisticated and want to know what a Tessa can do for them."

Nationwide has said it will offer a variable-rate Tessa 2 and a range of fixed-rate products if market conditions allow.

Portman Building Society is offering its Tessa holders a follow-up Tessa paying guaranteed interest at 7 per cent in the first year, rising by 0.5 per cent a year to 10 per cent in year five. The full pounds 9,000 capital has to be reinvested and is guaranteed to grow to pounds 13,300.

Take-up of this competitive offer is running at more than 60 per cent, the Portman says, but no decision has been taken on whether to extend it to the public at large.

Robert Fleming is openly touting for Tessa 2 business. Its fixed rate of 7.5 per cent a year guarantees a maturity value of pounds 12,920 on an investment of pounds 9,000.

HSBC Asset Management has also put down its marker, saying it intends to launch the first Tessa with returns determined by the FT-SE 100-share index.

It will guarantee a minimum return of 25 per cent over five years, even if the stock market bombs. The maximum return is 50 per cent, however much the market moves up.

An investment of pounds 9,000 could therefore grow to between pounds 11,250 and pounds 13,500, but staying the five-year term is essential in order to reach such returns.

Alan Gadd, managing director of HSBC Asset Management, says the figures may prove conservative and the actual deal when introduced in late January could offer more.

These are the few who have shown their hand, however. Most other Tessa providers are still debating how to pitch their terms.

Whether or not to invest in a Tessa 2 depends on the Tessa-holder's circumstances five years on and the merits of competing investments.

Maturity values of fully topped-up Tessas will be close to pounds 12,000.

If holders re-invest elsewhere, similar tax-free products include corporate bond peps, National Savings guaranteed income bonds (GIBs) and zero-dividend preference shares.

Corporate bond Peps offer higher yields than Tessas - Commercial Union Monthly Income is currently paying 8.9 per cent - but most also levy initial and annual charges. They are more flexible as they need not be held for five years, but are not guaranteed and capital erosion is a danger.

Corporate bond Peps can also only accept investment of pounds 6,000 a year per person, so they can shelter half of the full Tessa maturity value.

National Savings GIBs are akin to Tessas in that they are five-year deposit accounts.

The forty-second issue pays a fixed 5.85 per cent a year and the index- linked eighth issue pays 3 per cent above inflation. GIBs also lock the money away for five years and presently pay around 7 per cent fixed per annum.

Zeros, one of the classes of share in a split-capital investment trust and available through stockbrokers, can be bought and sold at any time and are free of income tax though liable to capital gains tax.

The trusts have 10-year lives and their redemption values on winding up are not guaranteed, but are usually well covered. Gartmore Scotland, redeem- able in July 2001, is presently yielding 8.1 per cent with a generous 125 per cent cover.

Alternatively, Tessa-holders may want to raise their risk profile and try equities. Reinvested in a Pep, the tax-free attractions of a Tessa would be retained while potential returns over time would increase.

Likely investments would be a high-income Pep like Perpetual Income, Schroder Income or M&G Equity Income.

Such a course would, however, catapult Tessa-holders into the world of stock market volatility and unpredictable returns.

After considering the alternatives, they may prefer to stick with a high street deposit account and lap up the loyalty bonuses.

Portman is adding a 2 per cent bonus on the entire balance of Tessa 1 on maturity, worth up to pounds 232.

Nationwide has now promised Tessa 1 customers who reinvest in its Tessa 2 for the full five years an interest-rate bonus for Tessa 2 on maturity and a special incentive.

Over the coming weeks all Tessa providers will have to set out their stalls. Savers should wait and see the full offering before jumping.

They have six months after maturity of their first Tessa to make up their minds.

What you need to know about Tessas

Tessas (tax exempt special savings accounts) were launched in January 1991 as a five year tax free deposit account.

Savers can put in up to pounds 9,000, with a maximum first year deposit of pounds 3,000, up to pounds 1,800 in each of the next three years and pounds 600 in the final year. Interest can be withdrawn net, but the tax free status is lost if the capital is touched.

Tessa 2 will be available from January. Holders of existing Tessas can reinvest their capital up to a maximum of pounds 9,000 in a Tessa 2 in the first year provided they do so within six months of the old Tessa maturing.

If they miss the rollover opportunity, the first year investment limit reverts to pounds 3,000 for Tessa 2s.

The old investment limits apply to new savers.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search

Don't ignore the retirement warning - boost your pension

Nearly two-thirds of people aged over 45 haven't checked the performance of their pension, meaning around 10 million retirement savings schemes are at risk of underperforming

Swim against the tide: a country in the midst of a financial crisis, like Greece, may offer investment opportunities

History tells investors to keep their nerve when headlines scream 'crisis'

Swim against the tide: a country in the midst of a financial crisis, like Greece, may offer investment opportunities

Questions of Cash: 'I want a refund on my TV licence payments but they've turned my claim into a soap opera'

An Independent reader was told to send bank statements to prove payment

Santander's Kitti app aims to bring the good old cash kitty into the 21st century

The days of phoning round to chase up multiple contributions could well be a thing of the past

Once bitten? Research shows that, in 19 out of 20 cases, desperate people are introduced to loan sharks by relatives or friends

How to avoid loan sharks: The alternatives for people who need credit fast

Simon Read meets a woman who became trapped in a cycle of debt

Profiteering? British Gas customers hit again as energy giant fails to pass on profits hike

The company made £63 a second but is only passing on £37 a year cuts to customers

China's stock market has tanked in the last month, losing 30 per cent of its value

China's stock market crash, Greece crisis: how do they affect your finances?

Video: Tom Stevenson, investment director at Fidelity Worldwide Investments, says it’s good to be aware of what’s going on in the world

Payday lender Cash Genie forced to repay £20m to ripped-off customers

The high-cost credit company preyed on vulnerable people struggling because of the recession

Mark Carney warns that the decision is likely to come into 'sharper relief' by 'the turn of the year'

An interest rate rise may be on the way - act now to secure a better mortgage deal

Competition has driven rates down but they could start drifting upwards

Santander 123 is attractive for those seeking interest on credit balances

Switching your current account? Pick one that reflects the way you run your finances

Andrew Hagger has carried out some research to try to establish which accounts are strongest in each of the different areas

A reader hit trouble after booking accommodation in a St Andrews hostel for the Open

Questions of Cash: 'Golfing break landed in the bunker when the price on the booking site was way below par'

One reader encountered a problem when booking accommodation at the St Andrews Tourist Hostel through HostelBookers

The Money Shop this week became the latest payday lender to have an ad banned

Payday lenders slammed for 'misleading' claims: charities say they're still not doing enough to help borrowers

Debt charities say there seems scant evidence to back up CFA's latest report

The crooks, like these in the 1955 film The Ladykillers, are waiting in the shadows as people cash in their savings

Savers are embracing their pension freedom ... and so are the scammers

There have been fresh warnings that scammers are trying to trick people into using liberated cash to invest in dodgy schemes

Don't get burnt: holidaymakers should check their plastic

How to avoid costly debit or credit card charges on overseas trips

Taking the wrong plastic can be a costly mistake, leaving you paying over the odds for your holiday spending money to the tune of £68, maybe more

From as far back as the Seventies, women have been drawn to the tables, attracted by the sense of feeling like a celebrity

Gambling is on the rise - so is enough being done to combat problem betting?

More and more of the 'AB' classes are joining the vulnerable in playing the odds, as Neasa MacErlean reports
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Tax Manager / Accountant

    £35 - £50k DOE: Guru Careers: A Tax Manager / Accountant (ACA / CA / CTA) is n...

    Ashdown Group: Contracts Executive - City of London

    £35000 - £37000 per annum + benefits: Ashdown Group: Contracts Executive - Cit...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K: SThree: SThree Group have been well esta...

    Recruitment Genius: Call Centre Debt Collector - Multiple Roles

    £21000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

    Day In a Page

    Giants Club: After wholesale butchery of Idi Amin's regime, Uganda’s giants flourish once again

    Uganda's giants are flourishing once again

    After the wholesale butchery of Idi Amin's regime, elephant populations are finally recovering
    The London: After 350 years, the riddle of Britain's exploding fleet is finally solved

    After 350 years, the riddle of Britain's exploding fleet is finally solved

    Archaeologists will recover a crucial item from the wreck of the London which could help shed more light on what happened in the vessel's final seconds
    Airbus has patented a jet that could fly from London to New York in one hour

    Airbus has patented a jet that could fly from London to New York in one hour

    The invention involves turbojets and ramjets - a type of jet engine - and a rocket motor
    Tate Sensorium: New exhibition at Tate Britain invites art lovers to taste, smell and hear art

    Tate Sensorium

    New exhibition at Tate Britain invites art lovers to taste, smell and hear art
    10 best sun creams for kids

    10 best sun creams for kids

    Protect delicate and sensitive skin with products specially formulated for little ones
    Ashes 2015: Nice guy Steven Finn is making up for lost time – and quickly

    Nice guy Finn is making up for lost time – and quickly

    He was man-of-the-match in the third Test following his recall to the England side
    Ashes 2015: Remember Ashton Agar? The No 11 that nearly toppled England

    Remember Ashton Agar?

    The No 11 that nearly toppled England
    Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

    US betrayal of old ally brings limited reward

    Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
    VIPs gather for opening of second Suez Canal - but doubts linger over security

    'A gift from Egypt to the rest of the world'

    VIPs gather for opening of second Suez Canal - but is it really needed?
    Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

    Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

    Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
    The male menopause and intimations of mortality

    Aches, pains and an inkling of mortality

    So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
    Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

    'How can I possibly be on the list with these writers I have idolised?'

    Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
    Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

    Bettany Hughes interview

    The historian on how Socrates would have solved Greece's problems
    Art of the state: Pyongyang propaganda posters to be exhibited in China

    Art of the state

    Pyongyang propaganda posters to be exhibited in China
    Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

    Vegetarian food gets a makeover

    Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks