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?
Arts and Entertainment
Reimagined: Gwyneth Paltrow and Toni Collette in the film adaptation of Jane Austen's Emma
books
Arts and Entertainment
Jesuthasan Antonythasan as Dheepan
Cannes 2015Dheepan, film review
Sport
sport
News
Richard Blair is concerned the trenches are falling into disrepair
newsGeorge Orwell's son wants to save war site that inspired book
Arts and Entertainment
The pair in their heyday in 1967
music
Finacial products from our partners
Property search
Up and away: rates will rise but your mortgage won't escape its moorings with a long-term fix

Is a 10 year mortgage deal a fix too far?

A cut-price deal for a decade-long home loan - where's the problem? Only, says Simon Read, that circumstances can change and it won't be easy to get out
In a surprise move the Tories have decided against putting a career politician into the job. Instead they’ve handed the responsibility to campaigner Ros Altmann

New pensions minister has massive job on her hands

The Tories have appointed campaigner Ros Altmann to the post

Promises, promises: David Cameron talks to staff at Asda's head office in Leeds today

General Election 2015: How you vote next week could affect your finances

Rival party pledges could shrink your savings or grow your nest egg
Logos for the 'Big Six'; energy companies (top row from left) British Gas, EDF, RWE npower, (bottom row from left) SSE, E.ON and ScottishPower

Winter heating underpayment brings summer pain

One reader’s monthly direct debit charge has been increased by 62 per cent

Almost 15,000 people died last winter through living in cold homes that they couldn’t afford to heat

Social tenants locked into energy tariff for 40 years

Many Londoners who live in social housing estates are not allowed to switch because their landlord has ‘locked’ them in to buying from one supplier

Will your credit card rewards be scrapped following new EU rules on charges?

Providers are unhappy with new EU rules - but ultimately it is customers who will have to foot the bill
There remain more than a million unclaimed Premium Bond prizes worth collectively around £48m

Have you won £1m in the May Premium Bonds draw?

More than £60m was paid out to more than 2 million prizewinners this month

The 0 per cent introductory deals that credit cards offer are one of the most odious tricks

Beware credit card firms’ odious tricks

Why can’t we just have open and honest charges, without all the cross-subsiding?

The pound’s recent strength against the euro could be hit by economic uncertainty under a new government

How planning can make your travel cash go further

With the pound at a high against the euro, it pays to buy now before uncertainty post-election

Put the phone down on the coldcallers who see pension liberation as an opportunity to liberate your pension from you

Pension freedoms: How to deal with cold calls from scammers

Sean O'Grady offers advice on keeping your money safe
Switching to a better bank account is much easier than it used to be

More people are switching current accounts – but what do the figures mean?

Experts disagree about the 7% increase over the past year

The chance of getting what appears to be free money can be hugely attractive, especially to first-time buyers who can be fooled into thinking it’s extra cash to buy the essential new items they need for their dream home.

Beware the boom in cashback mortgage deals

Too many mortgages are being sold with misleading gimmicks

The firm’s revenues slumped by a third to £217 million in a disastrous 2014

Wonga results could get even worse this year, chief admits

The firm’s revenues slumped by a third to £217 million in 2014

The cost of a buildings policy has dropped by 10.1 per cent over the year, with the cost of a contents policy falling by 8.2 per cent

Simon Read: Mild winter cuts the cost of home insurance

The average quote for a buildings and contents policy has fallen by 3.6 per cent

Don't count your retirement money yet: employers will stop receiving a pension rebate next year and their staff may lose out

Defined-benefit pension schemes: Rebate change in 2016 may leave you out of pocket

Employees in defined-benefit schemes are held up as the lucky ones, but the state pension scheme will be overhauled in April 2016
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Software Developer / C# Developer

    £40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

    Neil Pavier: Management Accountant

    £45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

    Sheridan Maine: Commercial Accountant

    £45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

    Laura Norton: Project Accountant

    £50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

    Day In a Page

    Abuse - and the hell that came afterwards

    Abuse - and the hell that follows

    James Rhodes on the extraordinary legal battle to publish his memoir
    Why we need a 'tranquility map' of England, according to campaigners

    It's oh so quiet!

    The case for a 'tranquility map' of England
    'Timeless fashion': It may be a paradox, but the industry loves it

    'Timeless fashion'

    It may be a paradox, but the industry loves it
    If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

    Could have done with Osama bin Laden staying alive?

    Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
    New exhibition celebrates the evolution of swimwear

    Evolution of swimwear

    From bathing dresses in the twenties to modern bikinis
    Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

    Sun, sex and an anthropological study

    One academic’s summer of hell in Magaluf
    From Shakespeare to Rising Damp... to Vicious

    Frances de la Tour's 50-year triumph

    'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
    'That Whitsun, I was late getting away...'

    Ian McMillan on the Whitsun Weddings

    This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
    Kathryn Williams explores the works and influences of Sylvia Plath in a new light

    Songs from the bell jar

    Kathryn Williams explores the works and influences of Sylvia Plath
    How one man's day in high heels showed him that Cannes must change its 'no flats' policy

    One man's day in high heels

    ...showed him that Cannes must change its 'flats' policy
    Is a quiet crusade to reform executive pay bearing fruit?

    Is a quiet crusade to reform executive pay bearing fruit?

    Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
    The King David Hotel gives precious work to Palestinians - unless peace talks are on

    King David Hotel: Palestinians not included

    The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
    More people moving from Australia to New Zealand than in the other direction for first time in 24 years

    End of the Aussie brain drain

    More people moving from Australia to New Zealand than in the other direction for first time in 24 years
    Meditation is touted as a cure for mental instability but can it actually be bad for you?

    Can meditation be bad for you?

    Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
    Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

    Australia's first-ever Eurovision entrant

    Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine